Tracking Correlations: Risk, Trailing correlations, correlation coefficients and Trading decisions

Agnes recently did a lot of work in putting together a short course on correlations from a risk and trading point of view. Unlike the boring text book stuff, there are some interesting lessons and applications here if you want to track correlations over a period of time as a trader or risk manager. This is the same methodology we use to track crude oil, precious metals (gold, silver) and currencies as part of our own internal analysis. Given the number of queries we get on our methodology I thought this post should put a lot of questions to rest.

Enjoy the course.

Correlation – Introduction

Next raw data time series line graphs such as price trends and derived data graphs such as volatility trend lines including the methodology for constructing line graphs in EXCEL.

Correlation – Times series data graphs –Prices & More

Scatter plots, a visual representation of the correlation coefficient tackled a little bit later on the course.

Correlation – Scatter Plots

An example of the calculation of the correlation coefficient method is given in our available-for-sale Computational Finance – EXCEL examples course “Portfolio Risk Metrics Example“.

Correlation – Correlation coefficient, r

The trailing correlations graph, a graphical representation of how correlations have changed over a period of time.

Correlation – Trailing correlations

Finally, we look at an additional way of viewing the time series data of two factors- the relative price graph and its various uses:

Correlation – Relative Price Graphs