A cautionary note on computing conditional from unconditional correlations
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Date
2009-01
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Abstract
We show that some care should be exercised when inferring true unconditional correlations from observed conditional correlations, which is a frequent problem in empirical finance and elsewhere. We give a general formula for the relationship between the two and demonstrate its importance in the context of the bivariate t-distribution.
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Keywords
conditional correlation, stock returns, t-distribution