Abstract
Relationships between financial instruments are very important in practical portfolio management. Under the assumption of stability, when the second moment does not exist, traditional relationship measures cannot be applied. In this paper we introduce new general correlation measures. Results of the empirical analysis of the selected equities from Baltic States market are given as an example.
Highlights
When constructing a financial portfolio it is essential to determine relationships between different stock returns
Under the assumption of stability covariance and correlation (Pearson correlation coefficient) can not be applied, since the variance and the mean do not exist
Under the assumption of stability it is purposeful to apply a generalized covariance coefficient, codifference [8] and power relation measures proposed in this paper
Summary
When constructing a financial portfolio it is essential to determine relationships between different stock returns. Under the assumption of stability (sets of stock returns are modelled by stable laws) covariance and correlation (Pearson correlation coefficient) can not be applied, since the variance (if the index of stability α < 2 ) and the mean (if the index of stability α < 1 ) do not exist. In this case we can apply rank correlation coefficients (e.g., Spearman or Kendall) or the contingency coefficient [4], [5, p. Each mixed-stable random variable is described by 5 parameters: the first one and most important is the stability index α ∈
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
