Readings and references in investment strategy and policy, for institutions and individuals who desire to take practical advantage of what is taught in the mainstream of financial economics. Total portfolio approaches; alpha and beta management; strategic asset allocation; manager structure (alpha) optimization; pension actuarial finance. Readings for individual investors, particularly on spending rules and investment risk.
Thursday, September 3, 2015
There Was Nothing I Could Do--All the Correlations Had Suddenly Gone to One!
Waring and Siegel post a new working paper, dealing with the frequently-heard claim after a losing streak that the underlying correlation structure had experienced a surprise change. They use an interesting approach to challenge traders and portfolio managers, as well as asset allocation strategists, to think beyond such simple claims. They show that rather than changes in the underlying correlation structure, short period realized correlations are widely distributed and highly random. The paper is supported by a user-friendly Excel(tm) spreadsheet, where the user can run simulations to explore the distribution of sub-period realized correlations given underlying "true" correlations between two assets. The working paper is here: Read working paper The supporting spreadsheet is here: OPEN SPREADSHEET
Posted by Barton Waring at 2:10 PM