The Pearson Correlation Model – Work of the Devil?

Nguyễn Thanh Thanh Huyền

No 2mpwh, OSF Preprints from Center for Open Science

Abstract: While by far the most applied correlation model in finance, the Pearson correlation model is – due to its simplicity and linearity – also the most heavily criticised: “Anything that relies on correlation is charlatanism” (Nassim Taleb) and “Instruments whose pricing requires the input of correlation … are accidents waiting to happen” (Paul Wilmott). In this chapter we address this contradiction and evaluate whether the Pearson correlation approach is rigorous and suitable for modelling associations in finance.

Date: 2015-01-28
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Persistent link: https://EconPapers.repec.org/RePEc:osf:osfxxx:2mpwh

DOI: 10.31219/osf.io/2mpwh

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