A Black-Litterman approach to correlation stress testing

F. C. Ng, W. K. Li and Philip L. H. Yu

Quantitative Finance, 2014, vol. 14, issue 9, 1643-1649

Abstract: Correlation stress testing is motivated by a well-known phenomenon: correlations change under financial crises. The adjustment of correlation matrices may be required to evaluate the potential impact of these changes. Very often, some correlations are explicitly adjusted (core correlations), with the remainder left unspecified (peripheral correlations), although it would be more natural for both core correlations and peripheral correlations to vary. However, most existing methods ignore the potential change in peripheral correlations. In this paper, we propose a Black-Litterman approach to correlation stress testing in which the stress impact on the core correlations is transmitted to the peripheral correlations through the dependence structure of the empirical correlations.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://hdl.handle.net/10.1080/14697688.2013.843022 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:14:y:2014:i:9:p:1643-1649

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697688.2013.843022

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().