Read e-book online Anticipating correlations : a new paradigm for risk PDF

By Robert Engle

ISBN-10: 0691116415

ISBN-13: 9780691116419

ISBN-10: 1400830192

ISBN-13: 9781400830190

Monetary markets reply to info almost right away. every one new piece of knowledge impacts the costs of resources and their correlations with one another, and because the procedure quickly alterations, so too do correlation forecasts. This fast-evolving setting offers econometricians with the problem of forecasting dynamic correlations, that are crucial inputs to probability dimension, portfolio allocation, Read more...

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In asset allocation problems or risk management problems, portfolios are optimized to reduce risk. Clever algorithms will find these apparently riskless or negative-risk portfolios and put capital into them; in order for these applications to be successful it is essential to eliminate this possibility. Generally, the existence of negative- or zero-variance portfolios must be considered to be a misspecification of the covariance matrix. 1 The Moving Average and the Exponential Smoother The most widely used covariance matrix estimators are the simplest.

37) suggests a testing procedure for the accuracy of covariance estimation. Constructing optimal portfolios with a particular vector of excess returns, the portfolio with the smallest variance is the one corresponding to the best covariance estimate. The null hypothesis 28 2. Correlations in Theory that these variances are equal can be tested following Diebold and Mariano (2002) for one vector of expected returns. An improved version of the test statistic is given by Engle and Colacito. Similarly, a joint test can be constructed for a finite set of ms.

19) These two measures will not in general be the same but they are usually quite close. If the copula is Gaussian, then they will possibly have the same expectation. If the copula is not Gaussian, then there are settings where the estimates will differ substantially. For example, if the copula has substantial probability near 0 or 1 on both variables, then the pseudo-normals will have observations approaching ±∞ and will lead to higher pseudo-correlations than rank correlations. Another widely used measure of dependence is Kendall’s tau.

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Anticipating correlations : a new paradigm for risk management by Robert Engle

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