You are on page 1of 31

Correlations and Copulas

1-31

FRMFinancial Risk Manager

Correlation and Covariance

2-31

FRMFinancial Risk Manager

Correlation and Covariance

3-31

FRMFinancial Risk Manager

Correlation and Covariance

4-31

FRMFinancial Risk Manager

Calculate Covariance using the EWMA and GARCH(1,1) Models.

Covariance using the EWMA

5-31

FRMFinancial Risk Manager

Covariance using the EWMA

6-31

FRMFinancial Risk Manager

Covariance using the EWMA

7-31

FRMFinancial Risk Manager

Covariance using the GARCH(1,1)

8-31

FRMFinancial Risk Manager

Covariance using the GARCH(1,1)

9-31

FRMFinancial Risk Manager

Evaluating Consistency for Covariance

w w 2w1w2 1 2 w1
2
P

10-31

2
1

2
1

2
2

2
2

12
w2
1 2

FRMFinancial Risk Manager

1 2 w1

2
w
2 2

Evaluating Consistency for Covariance

11-31

FRMFinancial Risk Manager

Multivariate Normal Distributions

12-31

FRMFinancial Risk Manager

Generating Samples from Normal Distributions

X ZX
Y Z X ZY 1 2
13-31

X 1

Y

Z X

2
Z
1 Y
0

FRMFinancial Risk Manager

Factor Models

14-31

FRMFinancial Risk Manager

Copulas

15-31

FRMFinancial Risk Manager

Copulas

16-31

FRMFinancial Risk Manager

Copulas

17-31

FRMFinancial Risk Manager

Copulas

18-31

FRMFinancial Risk Manager

Copulas

19-31

FRMFinancial Risk Manager

Copulas

If =0, then P(V1<0.1, V2<0.1)=2%5%=0.001

20-31

FRMFinancial Risk Manager

Other Copulas

21-31

FRMFinancial Risk Manager

Tail Dependence

22-31

FRMFinancial Risk Manager

Tail Dependence

23-31

FRMFinancial Risk Manager

Tail Dependence

24-31

FRMFinancial Risk Manager

Example
1.

25-31

FRMFinancial Risk Manager

Example

26-31

FRMFinancial Risk Manager

Example
2.

27-31

FRMFinancial Risk Manager

Example
3.

28-31

FRMFinancial Risk Manager

Example
4.

29-31

FRMFinancial Risk Manager

Example
5.

30-31

FRMFinancial Risk Manager

FRM

31-31

FRMFinancial Risk Manager