Correlation Thinking

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The problem with correlation is that relationships between instruments change with time and correlation potentially fails you when you most need it: in times of crisis. You might set risk management thresholds based on correlation levels “pre-crisis”, which blow out when the crisis arrives with most products “correlating” more than they have in the past and generating larger exposure than anticipated with correlation analysis…

To quote Taleb: “Anything that relies on correlation is charlatanism”

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