This paper analyzes the relation between correlation risk and the cross-section of hedge fund returns.Legal framework and investment mandate imply that hedge funds can be severely exposed tocorrelation risk: Hedge funds ability to enter long-short positions can be useful to reduce marketbeta,...

Starting from the Merton framework for firm defaults, we provide the analytics and robustness of the relationship between default correlations. We show that loans with higher default probabilities will not only have higher variances but also higher correlations between loans. As a consequence,...

In den letzten Jahren wurden verschiedene Modelle entwickelt, um das Ausfallrisiko von Banken unter Berücksichtigung von Portfolioeffekten zu quantifizieren. Bisher hat sich kein Ansatz als allgemein akzeptierter Standard durchsetzen können. Da die Modelle grundlegende konzeptionelle...

This paper examines search with active learning and correlated information. We firstdevelop a simple model to show how correlation affects the decision to acquire information.A unique data set on fishing site choice by mid-Atlantic clam fishermen is used to test themodel predictions. Results...

In this paper we propose tests for hypotheses regarding the parameters of the deterministictrend function of a univariate time series. The tests do not require knowledge of the form ofserial correlation in the data and they are robust to strong serial correlation. The data cancontain a unit root...

Pairwise stock correlations increase by 27% on average when stock returns arenegative. It is trading activity in small stocks that leads to higher correlationswhen returns are negative. We provide evidence consistent with the hypothesisthat co-ordinated selling by retail investors drives this...

We use multivariate regime switching vector autoregressive models to characterize the time-varyinglinkages among the Irish stock market, one of the top world performers of the 1990s, and the US andUK stock markets. We ¯nd that two regimes, characterized as bear and bull states, are required...

This article defines correlation products andexplores the problems they raise for risk management systemsin financial institutions. It explains the difficulties ofanalyzing nonseparable risk in one type of correlation product,the differential (diff) swap, and describes the much simpler...

Recent empirical studies claim to have identified roots of Africa’s poverty in its colonial past, particularly in the ‘extractive’ or ‘illegitimate’ institutions that the colonial powers bequeathed. While taking a similar quantitative approach this paper accepts the view of many...

This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as...