Correlation Thinking

All credit to www.michaelcovel.com/2010/08/05/correlation-thinking/

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”

Leave a comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: