Financial Correlations - Modeling, Trading, Risk Management and AI
Financial Correlations - Modeling, Trading, Risk Management and AI
Pre-conference workshop: July 16th
Financial Correlations - Modeling, Trading, Risk Management and AI
Led by:
Gunter Meissner, CEO, DerSoft and Adjunct Professor of MathFinance, COLUMBIA UNIVERSITY & NYU COURANT
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08:30
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REGISTRATION & REFRESHMENTS
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09:0
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Introduction: What are Financial Correlations and why are they Critical in Finance?
- Investments and Correlation – A new Correlation based Portfolio Performance measure
- Trading and Correlation
- Risk Management and Correlation
- The Global Financial Crisis and Correlation
- Regulation and Correlation
- AI and Correlation
Empirical Properties of Correlation: How do Correlations behave in the Real World?
- How do equity correlations behave in a recession, normal economic period, and economic expansion?
- Do equity correlations exhibit Mean Reversion?
Excel Exercise: Programming a Mean Reversion Test of a Time Series
- Do equity correlations exhibit Autocorrelation?
Excel Exercise: Programming Autocorrelation of a Time Series.
- Is Mean Reversion the ‘reverse property’ of Autocorrelation?
- How are equity correlations distributed?
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10.30 |
MORNING BREAK |
11.00 |
How can we Quantify Financial Correlations?
- An Overview of 15 Models
The most Critical Models:
- The popular Pearson correlation model – Work of the Devil?
Excel Exercise: Programming the Pearson multiple Regression Function and
- Correlation Parameters
- Correlating Brownian motions (Heston 1993) and Extensions
Excel Exercise: Programming the Heston Correlation Model
- Copulas (Sklar 1959, Vasicek 1987, Li 2000)
Excel Exercise: Programming the Gaussian Copula Model
- Limitations of Copulas: Should we apply Copulas in Financial modelling?
- Conclusion: Will there be a Black-Scholes-Merton Correlation model, which will dominate Correlation modelling?
Cointegration – A Superior Model to Correlation?
- Basics: Stationary process and Integration to the order d
- Application of Cointegration in Finance: Tracking an Index, Pairs Trading, Cost-effective Hedging
- A practical Approach to Implementing Cointegration
- Granger Causality: True causality or just Granger causality?
- Conclusion: Is Cointegration superior to Pearson correlation?
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12.30 |
Lunch |
1.30 |
Should we model Financial Correlations with a Stochastic Process?
- Recap from Chapter 2: Empirical Properties of Financial Correlations
- Which ingredients should a Stochastic Process for Financial Correlations have?
a) Should we include Mean Reversion
b) Should we bound the Process?
Excel Exercise: Programming White Noise, the Geometric Brownian Motion with Jumps and the bounded Jacobi process
- The Buraschi et al 2010 model and the Lu and Meissner 2018 model
Correlation Trading
- Empirical Correlation Trading
- Pairs Trading
- Multi-asset Options
- Structured Products
- Correlation Swaps
- Dispersion trading
- Which Trading Strategy is the most promising?
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3.00 |
How to quantify Market Correlation Risk and Credit Correlation Risk
- The Correlation Risk Parameters Cora and Gora
- Applying Cora and Gora to Market Risk Modeling, i.e. VaR and ES
- Applying Cora and Gora to Credit Risk Modeling, i.e. to CDS and CDOs
- The 2007-2009 CDO disaster. Are Cora and Gora of Copulas to blame?
Correlation and AI
- What fuels AI?
- Will AI funds outperform the market?
- Neural Networks and Correlation
- Ridge and Lasso Regression – Pros and Cons
- Ensemble learning – Consensus Clustering, Bayesian optimal classifier, Boosting
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