Model Risk of Correlation Products. PRESENTED TO:Risk Magazine's Training Course: Advanced Correlation Modelling & Analysis BY:Martin Goldberg, Director [email protected] Head of Model Validation Risk Architecture Citigroup
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Model Risk of Correlation Products
PRESENTED TO:Risk Magazine's Training Course:
Advanced Correlation Modelling & Analysis
BY:Martin Goldberg, Director
Head of Model Validation
New York, New York
DATE:May 11, 2006
PLACE:New York City
Absolute change in yield (%)
Comparison of normal, rescaled normal and (gXh) distribution fits to 10 day changes in idiosyncratic spread for single-B bonds using EJV data. Rescaled Cumulative Normal fits at 99th percentile.
Extreme Funnel Extreme Galaxy
Gaussian Copula Density
Contagion can be defined as a significant difference in the association between large moves (tail events) relative to the association between smaller moves (ordinary days). This is Tail Dependence. As an example study, here is a test of contagious increases in Pearson correlation between Brent oil and kerosene, using 215 pairs of weekly historical spot data. Since you always should use a control, I have also used 215 pairs of random numbers with the same correlation of 63%.
Null hypothesis is an elliptical distribution, so eliminate center of distribution where
Upper tail dependence, but not lower, is found in the US Treasury curve.
Barry Schachter’s gloriamundi.org website has many other such tail dependence papers.
High leverage data points