Questions tagged [correlation]

A measure of the degree of linear association between a pair of random variables.

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220 views

How to calculate the contribution (%) of an asset to the global correlation of the portfolio?

I have a portfolio X with weights $w_i$. I am trying to find the contribution $\xi_i$ of asset $i$ to the total correlation $\rho_{XM}$ of the portfolio X to an index M. I can't find these ...
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126 views

Ordered correlated random numbers

I'm not sure how feasible this is. I'm aware of how to generate correlated random numbers using a cholesky decomposition. However, say I have a fixed data set in increasing order (e.g. Price series: $...
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207 views

Implied correlation

Have I understood it correctly if the standard way to calculate implied correlation is the Gaussian Copula model where we: Calibrate the underlying portfolio to get a homogenous default probability ...
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52 views

Calculate price variance caused by denominating currency

I would like to calculate asset correlations while excluding movements resulting from the denominating currency (as much as possible). My common sense tells me that any two assets with the same ...
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278 views

Pearson correlation coefficient based on OHLC data

Pearson correlation coefficient based on OHLC data I've found only this article "Estimating correlation from high, low, opening and closing prices" by L. C. G. Rogers and Fanyin Zhou (2007) http://...
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2k views

Counterintuitive time varying Beta with Kalman filter

If you're used to play with R, you'll enjoy the following reproducible code: ...
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657 views

Absolute or relative strikes?

World, When pricing a CMS Spread Option the market practice consider the strike as relative to ATM or Absolute? If I relate to the following paper page 70 the author refers to absolute strike [1] ...
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82 views

Implementation of total correlation of assets in R

I am trying to implement the (average) total correlation of assets, which is discussed here and here in R. Specifically, I am looking at $\rho_{av(1)}$ and $\rho_{av(2)}$: $$ \rho_{av(1)} = \frac{2 \...
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What is the best way to “fix” a covariance matrix that is not positive semi-definite?

I have a sample covariance matrix of S&P 500 security returns where the smallest k-th eigenvalues are negative and quite small (reflecting noise and some high correlations in the matrix). I am ...
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1answer
425 views

Correlation of asset X with a portfolio of asset Y and Z [closed]

I have three assets and a covariance matrix. How do I calculate the correlation of asset X with a portfolio that includes assets Y and Z? For example, assume I want to calculate the correlation of ...
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1answer
1k views

Gaussian vs Student Copula applied to finance

I would like to get your opinion on the following topic: I am comparing the behaviour of Gaussian and Student-t Copulas. I employ the follwing procedure: Simulate N=100,000 samples from a Student ...
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345 views

Control for non-synchronous trading in correlations

I am trying to replicate some results from the Betting Against Beta paper by Frazzini & Pedersen. In section 3.1, Estimating Ex Ante Betas, they illustrate their approach to correlations: [we ...
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104 views

Two time series similarity with slightly offset timestamps [closed]

Let's say I have two time-series S1 and S2 where S1 looks like this: ...
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3k views

What is the total correlation between assets in a portfolio?

Suppose I have portfolio with 10 assets, each one of them with a weight of 10% from the total portfolio (equally weighted). It's well known how to measure from historical prices->returns a variance-...
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491 views

z-score versus log standardisation of stock prices for calculating correlation; which to use (in ML clustering, distance measure)?

I need to compare (get correlation between) different financial instruments (stocks). The problem is that different stocks will have different price scales. I was thinking of using z-score ...
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269 views

CDO Implied correlation: what for?

Reading about CDOs and calibration to find the implied correlation, I came up with the following question. Suppose we are pricing a CDO over a pool of $N=125$ names, using the usual Gaussian copula ...
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1k views

How variance dispersion trades become short volatility

From this document, http://quantlabs.net/academy/download/free_quant_instituitional_books_/[JP%20Morgan]%20Variance%20Swaps.pdf, on page 56, it states that Losses from short correlation through ...
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805 views

portfolio diversification tester

Are there any online tools (optionally with developer API, to spare me the scraping) that given an existing portfolio, calculate how well a new candidate position would score to increase combined ...
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35 views

Spot an activity of stock tickers

I've got 5 minute interval data of the 500 most viewed tickers. I would like to try to correlate changes in place in ranking of given ticker with volatility of underlying asset (for given stock market)...
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1answer
351 views

Pricing and Hedging an Option through a Currency Triangle

How is the option price of an plain vanilla option (in a Black Scholes setting) derived, which is written on, say XAGGBP but practically hedged with XAGUSD and GBPUSD (because these are more liquid)? ...
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1answer
90 views

Transform raw forecasts into orthogonal forecasts

I am trying to combine multiple forecasts on each of N assets in line with Grinold and Kahn's methodology, taken from Active Portfolio Management, 2nd ed. On p.311, they suggest transforming the raw ...
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268 views

Correlation of Asynchronous Brownian Motion

I am trying to use the closing prices of the S&P 500 and the Nikkei Index to see how they are correlated (assuming they are exactly 12 hours apart). In order to test my method, I have generated ...
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60 views

P2P lending and correlation with other major asset classes

I am looking for a credible study (i.e. a good/reputable source) into the correlation of returns on assets in Market Place Lending / Online Direct Lending / Alternative Finance with other major asset ...
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1answer
114 views

Return correlations

Assume an equity fund sample shows returns negatively correlated with the S&P 500. Are we more inclined to say that a) these funds are invested outside the S&P 500, perhaps non-US stocks; b)...
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Time series pair X, Y, with first half correlation 0.3 and rest half 0.4, what is the general correlation? [closed]

As is stated by the title Time series pair X, Y, with first half correlation 0.3 and rest half 0.4, what is the general correlation?
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1answer
123 views

Adding negative EV position to portfolio for diversification?

Say I have a portfolio of expected return $10\%$ and volatility $20\%$. If I have another asset that is either one of: Negatively correlated Positively correlated Uncorrelated With negative expected ...
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174 views

Why does the presence of cointegration solve the problem of spurious correlation? [closed]

Many of us are familiar with the connection between spurious correlation and its relationship to cointegration. Granger explains in his seminal 1974 paper "Spurious Regressions in Econometrics" how ...
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Portfolio of single stock short put options: which correlation structure preferrable?

Let's say you want to have a equally-weighted (in terms of the option price) portfolio of short put options on various stocks with the same maturity. Running Monte-Carlo simulations, it seems that ...
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611 views

Low beta and high correlation

Assuming that time period used to calculate the beta and correlation between an index and an asset is the same, is it possible to observe low beta while having high correlation? If yes, how would ...
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293 views

Correlation between two indexes

The Global Minimum Variance has an annual return standard deviation of 9.9%. Its correlation with the Standard & Poor's 500 Index is 0.45. What is the annual return standard deviation of the S&...
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4k views

Do two stocks with the same beta have a correlation of 1?

If two stocks have the same beta over same time period, does it mean they are 100% correlated over that time period? In a CAPM framework, a stock's beta is defined as $$\beta_1={\rm Cov} (R_1, M) / {...
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43 views

Simulating Co-Integrated Assets

I know how to simulate correlated returns, but I do not know how to simulate Co-Integrated assets. I would like to simulate a co-integrated time series where the Beta Co-Efficient is not constant, but ...
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1answer
78 views

Decreasing dependence during the financial crisis?

In "Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach" by Christoffersen et al. (2012), the authors present the concept of Conditional Diversification Benefit ...
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1answer
226 views

Computing Correlation between Forward Rates

I have the feeling this question has an extremely simple answer but I'll put it out to the group anyway. Imagine I have data for 3M and 6M forward rates following a lognormal process, and that I ...
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2answers
112 views

Co integration of diverging time series

I have 2 time-series datasets. I am trying to find co integration between them. Now the thing is they are negatively correlated. So if I want to look at the distance between them, would I be right in ...
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70 views

Puzzler on construction of a 2-stock portfolio

Lets say you get to choose any 2 stocks. Is it possible that a portfolio can be built from the two stocks (long or short either, any weighting) that has a lower volatility (standard deviation of ...
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603 views

FX Forward pricing with correlation between FX and Zero-Cupon

I would like to extend my question about about FX Forward rates in stochastic interest rate setup: FX forward with stochastic interest rates pricing We consider a FX process $X_t = X_0 \exp( \int_0^t(...
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1answer
1k views

How to estimate an Engle's asymmetric DCC model in R?

I have a $N x d$ matrix of standardized residuals, and I want to estimate the parameters $\alpha$, $\beta$ and $\gamma$ of the asymmetric version (Cappiello, Engle, Sheppard, 2006) of the usual ...
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392 views

Average Correlation

We're given a spreadsheet with a correlation matrix for four stocks. Then there is a calculation for average correlation, but I don't know how it's derived. $$=\left(\operatorname{Average}(C14:F17)-\...
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80 views

How exactly are correlated defaults used/analyzed?

I've read a lot about correlate defaults but I can't seem to understand how they're used practically in a portfolio theory setting. Suppose I have two (?) companies, X and Y, and historic default ...
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Why do two perfectly negatively correlated assets not return 0%? [closed]

So, per the title, why would a combination of two risky assets that have the same exact expected return and standard deviation while being perfectly negatively correlated not return 0%? Why do you ...
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226 views

How to replicate a correlation swap using only vanilla options and underlying

Assume I have two assets A and B that are positively correlated most of the time. I'm trading a strategy based on this correlation. Is there a way to protect myself in the event that the correlation ...
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1answer
864 views

Correlation of a lognormal asset and a normal asset

So if i want to calcualte the correlation between a pair of assets, my intuition is that i should calculate whatever correlation i plan on using; When we look at correlation, it's normally the ...
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439 views

Normalization of Market Data in Time Series Correlation

Suppose we have 2 time series of market data, one for each security and we want to correlate between these 2 securities. My question is How do we handle gaps of missing data in the time series? ...
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Account for empirical relationship between signal and market data

I have two monthly time series : one is a 'signal', on which I will base my decision to buy or short-sell, and the second one is the time serie of a given asset's price. I have implemented this ...
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325 views

Are two stochastic processes independent if the Wiener processes inside are uncorrelated

Assume there are two stochastic processes: $dx_t = \alpha_1(x_t,t)dt + \beta_1(x_t,t)dW^1_t$ and $dy_t = \alpha_2(y_t,t)dt + \beta_2(y_t,t)dW^2_t$. Does $dW^1_t\times{dW^2_t} = 0$ imply that $\...
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1answer
71 views

Why does the correlation between r and V in Longstaff and Schwartz 1992 model is positive?

I am reading the Longstaff and Schwartz's 1992 and 1993. From $r = \alpha x + \beta y$ and $V = \alpha^2 x + \beta^2 y$. It was mentioned in the paper that the $r$ is positive correlated with $V$. ...
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337 views

Correlation between asset A and Portfolio X (which contains A)

After a few hours trying to solve this I give up! I need help. I need to calculate the BETA of an asset with respect to a portfolio that contains this asset. I have the volatility and correlations ...
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2answers
150 views

Creating index from bloomberg data in matlab

I'v got 6 different equity index time series from which I want to create an index based on a particular percentage. This would be simple although due to different holidays the date don't always match. ...
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Correlation between 2 stocks [closed]

If Stock A returns 5% on average in year Y And Stock B returns 2% on average in year Y Does this mean that correlation is 40%?