Investors typically measure an asset’s potential to diversify a portfolio by its correlations with the portfolio’s other assets, but correlation is useful only if it provides a good estimate of how an asset’s returns co-occur cumulatively with the other asset returns over the investor’s...

In the banking industry, the common practice to correlate default and migration events of various guarantors is to use correlated asset price returns. This approach, which is basically a copula approach, is used also by KMV's GCorr model and JPMorgan's CreditMetrics model. However, these models...

Forward-looking correlations are of interest in different financial applications, including factor-based asset pricing, forecasting stock-price movements or pricing index options. With a focus on non-FX markets, this paper defines necessary conditions for option implied correlation matrices to...

The default of a participant at Nasdaq Clearing in 2018 and the recent COVID-19 events brought to the attention of risk managers at CCPs the importance of appropriately measuring correlation breakdowns. The sizable price dislocations registered on these occasions suggested that traditional risk...

The purpose of this paper is introducing rigorous methods and formulas for bilateral counterparty risk credit valuation adjustments (CVA's) on interest-rate portfolios. In doing so, we summarize the general arbitrage-free valuation framework for counterparty risk adjustments in presence of...

This article analyses the frequency components of European business cycles using real GDP by employing multiresolution decomposition (MRD) with the use of maximal overlap discrete wavelet transforms (MODWT). Static wavelet variance and correlation analysis is performed, and phasing is studied...

Investors rely on the stock-bond correlation for a variety of tasks, such as forming optimal portfolios, designing hedging strategies, and assessing risk. Most investors estimate the stock-bond correlation simply by extrapolating the historical correlation of monthly returns and assume that this...

Exposure to market risk is a core objective of the Capital Asset Pricing Model (CAPM) with a focus on systematic risk. However, traditional OLS Beta model estimations (Ordinary Least Squares) are plagued with several statistical issues. Moreover, the CAPM considers only one source of risk and...

We consider the problem of finding a valid covariance matrix in the FX market given an initial non-PSD estimate of such a matrix. The standard no-arbitrage assumption implies additional linear constraints on such matrices, which automatically makes them singular. As a result, one cannot just...

We consider the problem of finding a valid covariance matrix in the FX market given an initial non-PSD estimate of such a matrix. The standard no-arbitrage assumption implies additional linear constraints on such matrices, which automatically makes them singular. As a result, one cannot just...