Questions tagged [correlation]
A measure of the degree of linear association between a pair of random variables.
398 questions
1
vote
1
answer
186
views
On the correct definition of ex-post variables
I recently had an interview with a quant from a hedge fund and we were discussing about properly defining ex-post variables when backtesting the forecasting ability of certain market variables.
For ...
- 2,862
0
votes
0
answers
48
views
I want to calculate the rho in picture i upload for you, can you help me calculate the rho with stochastic or other math methodology?
I want to calculate the correlation coefficient (rho) from the scatter plot shown in the image below.
For linear relationships, I know that Pearson correlation can be used. But how can I estimate or ...
2
votes
1
answer
253
views
Clarification on Instantaneous vs Terminal Correlation in Stochastic Models
I'm studying Correlation Parameterization and Calibration for the LIBOR Market Model (page 22) and have some questions regarding the concepts of instantaneous correlation and terminal correlation. My ...
- 73
2
votes
0
answers
89
views
Impact of Freezing the Drift in LFM on Exotic Interest Rate Derivatives [closed]
Freezing the drift in the LIBOR Market Model (LFM/LMM) provides computational advantages and enables efficient pricing of various fixed-income products. Under this assumption, swap rates are ...
- 298
2
votes
2
answers
207
views
How inaccurate is the BSIV as compared to the Heston IV due to unaccounted correlation?
To provide more color to the question, after reading Christoffersen et al. (2013), I found out recently that the Heston model provides a more accurate future realized volatility estimate in the form ...
- 2,862
0
votes
0
answers
33
views
Resource on predicting trade patterns at the individual level
This is a behavioral question, but is applied to quantitative finance. Are there any resources on measuring/predicting trade patterns at the individual level. So if I am a financial broker, dealer, ...
- 119
0
votes
1
answer
127
views
Estimate swap rates correlation in absence of spread options
Any suggestions / pointers on how to estimate swap rates correlation in absence of spread options? Is it feasible to work it out with the correlation of forwards coming from the intersection of ...
- 169
2
votes
1
answer
316
views
Implied correlation smile
i'm currently reading the book of S.BOSSU ADVANCED EQUITY DERIVATIVES.
He is currently speaking about the implied correlation smile.
My question is : is it a sentiment indicator as the volatility ...
0
votes
0
answers
186
views
Heuristic for "optimising" assets in a min/worst of basket option
Given a universe of X stocks, I'm trying to find what combination of 3 would result in the highest premium for a 'Worst Of Put'
$$
max(1-min(\frac {S(T)_1} {K_1},...,\frac {S(T)_i} {K_i}),0)
$$
I ...
1
vote
1
answer
925
views
Pairs trading with 3+ assets
I am trying to understand how you would construct a pairs trading strategy on 3+ assets.
In the 2 asset case, assuming zero drift, we trade based on:
$$dX_t = \beta_AdS_t^A - \beta_B dS_t^B,$$
where $\...
- 81
0
votes
1
answer
267
views
How to construct a delta-neutral portfolio containing stocks using correlations?
I’m aware of the mean-variance framework where we construct a portfolio such that we attempt to minimise the variance and maximise returns.
What if instead we’re in a scenario where the main goal is ...
- 81
1
vote
0
answers
108
views
short-term statistical factor models for equities with different trading hours
I wonder if there are existing theory/literature about estimating a short-term statistical factor models for equities with different trading hours.
For example if we are estimating a universe with US ...
- 877
1
vote
0
answers
99
views
Correlation between a stock and the index without the stock
The weight of stock i in index m is w.
The returns are, respectively, r(i) and r(m).
I know the volatility s(i) of i, the volatility s(m) of m and the correlation rho(i, m) between i and m.
The index ...
- 11
2
votes
1
answer
272
views
How to design a strategy whose PnL is proportion to correlation?
I'm reading about this correlation breakout strategy, whose pnl is proportional to
$$E[PnL] \sim (\rho_{1D} - \rho_{2D})\sigma_1 \sigma_2$$
where $\rho_{1D}$ is the correlation of daily returns, and $\...
- 21
2
votes
3
answers
358
views
Analytic Hull White model with correlated stochastic processes
I am trying to price a path dependent option which uses two underlyings (a stock index and an interest rate index). I am using Hull White model for interest rate modelling and local vol for stock ...
- 35
0
votes
0
answers
59
views
Correlation risk between protection (seller) and reference entity
I am learning about central clearing.
In my understanding, CDS are usually cleared via central clearing.
But at the same time I heard that in case of too much correlation such as US bank selling ...
- 3
1
vote
2
answers
312
views
Covariance Matrix of Correlated Random Variable
Suppose I know or have estimated the covariance matrix for one random variable (for example an asset) and have:
$$
\begin{bmatrix}
<\text{spot, spot}> & <\text{atmv, spot}> \\
<\...
- 1,049
4
votes
0
answers
123
views
Monte-Carlo method for multi-asset pricing
As I was working on this paper https://hal.science/hal-00319947/document by Emmanuel Gobet, I came across this paragraph that says to price a barrier option on (for example) two correlated assets, you ...
- 41
1
vote
1
answer
1k
views
How to hedge a dual digital option
Let us assume we have two FX rates: $ 1 EUR = S_t^{(1)} USD$ and $ 1 GBP=S_t^{(2)} USD $. Let $K_1>0, K_2>0$ be strictly positive values and a payoff at some time $ T>0 $ (called maturity) ...
- 787
4
votes
1
answer
940
views
If returns are correlated, are Sharpe ratios correlated?
Suppose we have two correlated return series:
$$a \sim N(\mu_a,\sigma_a^2)$$
$$b \sim N(\mu_b,\sigma_b^2)$$
$$correl(a,b)=\rho$$
The sample Sharpe ratios of the two series, after $t$ samples for $t \...
- 460
1
vote
1
answer
142
views
correlation of 1/X [closed]
My question is the following.
If the correlation between the log-returns of X and Y is rho, what would be the correlation between the log returns of 1/X and Y ?
Thanks for your answers.
- 39
1
vote
0
answers
177
views
Alternative To Granger Causality?
Are there any other mathematical tests besides Granger that quants use to determine casual relations between two time series? If so what are they? How about convergent cross mapping?
Thanks
- 123
0
votes
1
answer
175
views
Correlation between CDS return relevance
I see that there is much literature that uses the correlation notion in the equity returns to construct a graph or look into how they are related to one another. If we want to extend this to Credit ...
- 123
2
votes
1
answer
492
views
Cholesky decomposition reduces volatility of simulated Wiener Process / Brownian Motions
I am trying to simulate $n$ correlated geometric brownian motions (GBM) given a specified correlation matrix $\Sigma$ by following this procedure which uses Cholesky decomposition.
However, when I ...
- 588
3
votes
0
answers
722
views
Local volatility implied spot vol correlation
I have a question about local volatility models.
In a lot of articles it is stated that the implied spot vol correlation of this model is -1 and we usually compare this with stochastic volatility ...
- 31