# Tag Info

## Hot answers tagged correlation

Accepted

### What is the total correlation between assets in a portfolio?

This is indeed an interesting question. According to this website, a paper by Goldman Sachs [Tierens and Anadu (2004)] proposes three alternative methods for estimating average stock correlations: ...
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### What is the most stable, non-trivial dependence structure in finance?

It is hard to find a stable non-trivial dependence structure in financial data. Usually when such is found it is hard to rationalize. One of my favorite (although I am sure there are others) is the ...
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### Correlation basket equities

Let us consider a basket $B$ with components $S_1,\dots,S_n$ : $$B(t) = \sum_{i=1}^nw_iS_i(t)$$ At time $t$, each component has standard deviation $\sigma_i$, $i \in \{1,\dots,n\}$, and pairwise ...
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### Estimate covariance matrix using prices

If you assume that a financial asset price has a change that is a wiener process then you can view the future value of that asset as the initial value plus the sum of the independent daily changes (...
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### How to design a strategy whose PnL is proportion to correlation?

You are looking for a correlation swap. There is a PhD thesis on static replication. Sébastien Bossu. Static replication of European options and dynamic replication of correlation swaps. Business ...
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### Average Correlation

He is forced to use some tricks because Excel can only take average of a rectangular area, but he wants the avg of upper non-diagonal elements of the matrix only. So he subtracts $\frac{1}{n}$ (the ...
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### Correlation between prices or returns?

There is a good explanation here. Summarizing, what we are computing with Pearson correlations are relations between deviations respect to the means, which is no meaningful using prices. So, you ...

### Pearson correlation coefficient based on OHLC data

Given only OHLC information, with no timing information as when H and L occured in relation to one another, the covariance between any two assets is only defined for O and C since you know when these ...
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### Control for non-synchronous trading in correlations

I contacted one the authors of the original paper. He confirmed that the overlapping three day log returns are to be used on both stock and market returns.
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### Why isn't it appropriate to use correlation between prices in a pairs trade strategy?

If you are correlating prices that would imply that you are sizing positions based on the number of shares in each position. This can result in a book that is very biased in terms of dollars invested....
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### How to calculate implied correlation via observed market price (Margrabe option)

We know that $-1\le\rho_{imp}\le 1$ so perhaps the simplest approach is to try the possible values $\rho_{imp}=\{-1,-0.9,-0.8,\cdots,0.8,0.9,+1\}$, to calculate resulting $\sigma$ values, d± values, ...
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### Brownian Motions theorems

For the first part looks quite obvious, since independence implies that the covariance is zero and since the correlation is just the covariance divided by the product of the standard deviations, it ...
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### Calculating Correlation of Two portfolios?

You may be over-thinking it. It is a straightforward calculation using matrices, as easy as turning the crank of a sausage-making machine. The standard deviation matrix is ...
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### How to test ESG score as a factor against traditional factors

Preliminary/Warning: A correlation test is not an appropriate method for analyzing potential risk-factors! Let's (very precisely) recall, what a risk-factor is (see Bali/Engle/Murray (2016), p.173f.),...
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### Correlation Gold and SPX in BBG

I do not think that you were terribly wrong thinking that gold and SPX (or equity market in general) are negatively correlated. The reason behind this is that gold and stocks are in fact negatively ...
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### Why does the likelihood of corner solutions in portfolios increase as the number of assets grows?

The source of the problem is twofold: Dimensionality of variance directions is low (most directions have close to 0 variance) Portfolio Optimization is prone to an unstable covariance matrix (which ...
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