Correlation: Pitfalls and Alternatives

Paul Embrechts A, Alexander J. McNeil, Daniel Straumann

1999-01-01article309 citationsclosed

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Financial Risk and Volatility Modeling Stochastic processes and financial applications Risk and Portfolio Optimization

Abstract

Correlation is a mineeld for the unwary. One does not have to search far in the literature of nancial risk management to nd misunderstanding and confusion. This is worrying since correlation is a central technical idea in nance. Correlation lies at the heart of the capital asset pricing model (CAPM) and the arbi-

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References

1999An Introduction to Copulas

1997Pitfalls in Tests for Changes in Correlations

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