Pitfalls in Tests for Changes in Correlations

@article{Boyer1997PitfallsIT,
  title={Pitfalls in Tests for Changes in Correlations},
  author={Brian H. Boyer and Michael S. Gibson and Mico Loretan},
  journal={Social Science Research Network},
  year={1997},
  volume={1997},
  pages={1-23}
}
Correlations are crucial for pricing and hedging derivatives whose payoff depends on more than one asset. Typically, correlations computed separately for ordinary and stressful market conditions differ considerably, a pattern widely termed "correlation breakdown." As a result, risk managers worry that their hedges will be useless when they are most needed, namely during "stressful" market situations. We show that such worries may not be justified since "correlation breakdowns" can easily be… 

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