Correlation Risk and Copulas
Free GARP FRM Part II lesson in Market Risk Measurement and Management. 22 min read, ~3,263 words.
Financial correlation risk is the chance asset correlations move adversely; correlations rise toward 1 in stress and diversification benefits evaporate exactly when capital is most needed. Empirical correlation properties: equity correlations are mean-reverting (daily speed below 0.05), regime-shifting, and right-skewed; equity fits Johnson SU, bonds mixed normal, default correlations state-dependent...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Check Your Understanding
- Exam Shortcuts
Learning objectives
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