09.00 - 12.15

Correlation in Modern Portfolio Theory: Diversification

Scenario Analysis & Stress Testing

• Tweaking Individual Entries in a Correlation Matrix
• Changing Blocks of Correlation Values
• Extrapolating Trends in Correlations: "Risk On" and "Risk Off" Scenarios
• Randomizing a Correlation Matrix
• Handling the Additivity of Conditional Correlations

A General Theory of Dependency: Copulas

• Introduction to Copula Theory
• Applications of Copula Theory
  • Data Analysis
  • Stress Testing

Exercise: Identifying copulas in an international asset class universe

Simulating Correlated Data

• Multivariant Normal Data
• Solutions for Non-Normal Data

12.15 - 13.15 Lunch Break

13.15 - 17.00

Stochastic Process Models for the Correlation Coefficient

Forecasting Correlations

• Historical Estimators
• Robust Estimators
• Bayesian Shrinkage Estimators: Jorion, Ledoit/Wolf
• Implied Correlations from Derivatives Instruments
• Deriving Asset Correlations from Factor Correlations

Time Series Models for Correlations

• Exponential Smoothing
• Multivariate GARCH
• Dynamic Conditional Correlation (DCC)

Exercise: Analysing the volatility risk of a multi-asset-class portfolio based on robust correlation scenarios

Termination and Evaluation of the Seminar