Related papers: On Biased Correlation Estimation
The downside risk of a portfolio of (equity)assets is generally substantially higher than the downside risk of its components. In particular in times of crises when assets tend to have high correlation, the understanding of this difference…
The risk of a financial position is usually summarized by a risk measure. As this risk measure has to be estimated from historical data, it is important to be able to verify and compare competing estimation procedures. In statistical…
We construct and analyze an estimator of association between random variables based on their similarity in both direction and magnitude. Under special conditions, the proposed measure becomes a robust and consistent estimator of the linear…
In structural credit risk models, default events and the ensuing losses are both derived from the asset values at maturity. Hence it is of utmost importance to choose a distribution for these asset values which is in accordance with…
Time-varying volatility is an inherent feature of most economic time-series, which causes standard correlation estimators to be inconsistent. The quadrant correlation estimator is consistent but very inefficient. We propose a novel…
Higher order correlation measurements involve multiple event averages which must run over unequal events to avoid statistical bias. We derive correction formulas for small event samples, where the bias is largest, and utilize the results to…
Cross-validation under sample selection bias can, in principle, be done by importance-weighting the empirical risk. However, the importance-weighted risk estimator produces sub-optimal hyperparameter estimates in problem settings where…
When assets are correlated, benefits of investment diversification are reduced. To measure the influence of correlations on investment performance, a new quantity - the effective portfolio size - is proposed and investigated in both…
Financial institutions have to allocate so-called "economic capital" in order to guarantee solvency to their clients and counter parties. Mathematically speaking, any methodology of allocating capital is a "risk measure", i.e. a function…
Growth-optimal portfolios are guaranteed to accumulate higher wealth than any other investment strategy in the long run. However, they tend to be risky in the short term. For serially uncorrelated markets, similar portfolios with more…
Estimating the covariance of asset returns, i.e., the risk model, is a key component of financial portfolio construction and evaluation. Most risk modeling approaches produce a factor model that decomposes the asset variability into two…
Predicting risks of chronic diseases has become increasingly important in clinical practice. When a prediction model is developed in a given source cohort, there is often a great interest to apply the model to other cohorts. However, due to…
In risk management, often the probability must be estimated that a random vector falls into an extreme failure set. In the framework of bivariate extreme value theory, we construct an estimator for such failure probabilities and analyze its…
Asset correlations are an intuitive and therefore popular way to incorporate event dependence into event risk, e.g., default risk, modeling. In this paper we study the case of estimation of inter-sector asset correlations by separation of…
Starting from the requirement that risk measures of financial portfolios should be based on their losses, not their gains, we define the notion of loss-based risk measure and study the properties of this class of risk measures. We…
Much of uncertainty quantification to date has focused on determining the effect of variables modeled probabilistically, and with a known distribution, on some physical or engineering system. We develop methods to obtain information on the…
For the past two decades investors have observed long memory and highly correlated behavior of asset classes that does not fit into the framework of Modern Portfolio Theory. Custom correlation and standard deviation estimators consider…
In financial asset management, choosing a portfolio requires balancing returns, risk, exposure, liquidity, volatility and other factors. These concerns are difficult to compare explicitly, with many asset managers using an intuitive or…
The discrepancy between realized volatility and the market's view of volatility has been known to predict individual equity options at the monthly horizon. It is not clear how this predictability depends on a forecast's ability to predict…
Probabilistic classifiers output a probability distribution on target classes rather than just a class prediction. Besides providing a clear separation of prediction and decision making, the main advantage of probabilistic models is their…