Dependency

Dependencyand
andCorrelation
Correlation
The
Theformulas
formulasininthis
thisexample
exampleillustrate
illustratetwotwoequivalent
equivalentways
waysof
ofmodelling
modellingdependence
dependencewith
with@RISK.
@RISK.TheTheassumption
assumptioninineith
eit
independent
independent draw is made each year from the joint distribution of interest rate and housing starts, but thisdistribution
draw is made each year from the joint distribution of interest rate and housing starts, but this distributionhh
correlation
correlationof
of-0.75.
-0.75. The
Theidea
ideaisisthat
thatinineach
eachyear,
year,aahigher
higherinterest
interestrate
ratetends
tendsto
tobe
beassociated
associatedwith
withfewer
fewerhousing
housingstarts.
starts
The
Thefirst
firstmethod,
method,shown
shownininrows
rows88and
and9,9,appends
appends@RISK's
@RISK's"old"
"old"RiskIndepC
RiskIndepCand andRiskDepC
RiskDepCproperty
propertyfunctions
functionstotothe
theusua
usu
and
and RiskNormal functions. Note that the first arguments of these functions in column C are "Year1", which identifiesthes
RiskNormal functions. Note that the first arguments of these functions in column C are "Year1", which identifies the
and
andsimilarly
similarlyfor
forthe
thepairs
pairsininother
otheryears.
years.Also,
Also,each
eachRiskDepC
RiskDepChas
hasaasecond
secondargument,
argument,thethecorrelation.
correlation.InInwords,
words,interest
interestr
independent
independentvariable
variableand
andhousing
housingstarts
startsisisthe
thedependent
dependentvariable
variableinineach
eachyear,
year,and
andthe
thecorrelation
correlationbetween
betweenthem
themisisalw
alw
The
Thesecond
secondmethod,
method,shown
shownininrows
rows1313and
and1414isisthe
themore
more"modern"
"modern"approach,
approach,andandititextends
extendstotomore
morethan
thantwo
twovariables
variable
@RISK's
@RISK's Define Correlations tool to build the correlation matrix in yellow and append a RiskCorrmat functionto
Define Correlations tool to build the correlation matrix in yellow and append a RiskCorrmat function toeach
eachform
for
example,
example,the
theRiskCorrmat
RiskCorrmatfunctions
functionsinincells
cellsC13
C13and
andC14C14have
havearguments
arguments(CorrMatrix,1,C12)
(CorrMatrix,1,C12)and and(CorrMatrix,2,C12).
(CorrMatrix,2,C12).The
The
arguments
argumentsindicate
indicatethese
theseare
arethe
thefirst
firstand
andsecond
secondcorrelated
correlatedvariables
variablesininthe
thepair,
pair,and
andthe
thelast
lastargument
argumentisisthe
theinstance
instance(1(
years).
years). The instance argument should be used when the same correlation matrix is being used multiple times, asititisishere
The instance argument should be used when the same correlation matrix is being used multiple times, as her
Once
Onceyou
yourun
runthe
thesimulation,
simulation,you
youcan
cancheck
checkcorrelations
correlationsas
asfollows:
follows:(1)
(1)select
selectany
anyblue
blueinput
inputcell,
cell,(2)
(2)click
clickBrowse
BrowseResults,
Results
scatterplot
scatterplotbutton
buttonbelow
belowthe
thehistogram,
histogram,and
and(4)
(4)choose
chooseaasecond
secondblue
bluecell
cellfor
forthe
thescatterplot.
scatterplot.Except
Exceptforforpairs
pairsof
ofrates
ratesand
an
given
givenyear,
year,the
thescatterplots
scatterplotsshould
shouldall
allshow
showaashapeless
shapelessswarm
swarmwith
withaacorrelation
correlationnear
near0.0.
 @RISK.
@RISK.TheTheassumption
assumptioninineither
eitherisisthat
thatan
an
g starts, but this distribution has a negative
ng starts, but this distribution has a negative
ted with
ated withfewer
fewerhousing
housingstarts.
starts.
property
propertyfunctions
functionsto
tothe
theusual
usualRiskTriang
RiskTriang
e "Year1", which identifies theseas
"Year1", which identifies these asaapair,
pair,
correlation. In words, interest rateisisthe
orrelation. In words, interest rate the
rrelation between
orrelation betweenthem
themisisalways
always-0.75.
-0.75.
nds
ndstotomore
morethan
thantwo
twovariables.
variables.ItItuses
uses
kCorrmat
kCorrmat function to eachformula.
function to each formula.For
For
2)2)and
and(CorrMatrix,2,C12).
(CorrMatrix,2,C12).The Themiddle
middle
ast
astargument
argumentisisthe
theinstance
instance(1(1toto55across
across
sed multiple times, as it is here.
used multiple times, as it is here.
t cell,
ut cell,(2)
(2)click
clickBrowse
BrowseResults,
Results,(3)
(3)click
clickthe
the
ot.
ot.Except
Exceptforforpairs
pairsof
ofrates
ratesand
andstarts
startsininaa
Parameters of inputs each year Distribution Parameter1 Parameter2 Parameter3 Correlation
Interest rate Triangular 2% 4% 8%
Housing starts Normal 100000 15000 -0.75

Correlated inputs with independent and dependent variables

Year 1 2 3 4 5
Interest rate 4.67% 4.67% 4.67% 4.67% 4.67%
Housing starts 100000 100000 100000 100000 100000

Correlated inputs using RiskCorrmat

Year 1 2 3 4 5
Interest rate 4.67% 4.67% 4.67% 4.67% 4.67%
Housing starts 100000 100000 100000 100000 100000

Outputs
Total housing starts, method 1 500000
Total housing starts, method 2 500000
@RISK Correlations Interest rate Housing starts
Interest rate 1
Housing starts -0.75 1