Handling Risk On/Risk Off Dynamics with Correlation Regimes and Correlation Networks

; (). Handling Risk On/Risk Off Dynamics with Correlation Regimes and Correlation Networks . Financial Markets and Portfolio Management, 29, 2. 125-147. Peer reviewed.

Handling Risk On/Risk Off Dynamics with Correlation Regimes and Correlation Networks

Abstract In this paper, we present a framework for detecting distinct correlation regimes and analyzing the emerging state dependences for a multi-asset futures portfolio from 1998 to 2013. These correlation regimes have been significantly different since the financial crisis of 2008 than they were previously; cluster tracking shows that asset classes are now less separated.We identify distinct “risk-on” and “risk-off” assets with the help of correlation networks. In addition to visualizing, we quantify these observations using suitable metrics for the clusters and correlation networks.
The framework will be useful for financial risk management, portfolio construction, and asset allocation.
Keywords Regime switching · Correlation regimes · Clustering · Correlation networks · Risk management · Portfolio construction · Asset allocation
JEL Classification C14 · G11 · G01 · D85

link.springer.com/article/10.1007/s11408-015-0248-2

Presentations:

- "Currency correlations in various timeframes and what this means for trading strategies", TradeTech FX, London, September 2014.

- "Beyond Risk Parity: Tail-Risiko-Absicherung mit aktiven Strategien", Investor Circle, Zurich, Juni 2014.

- "Multi-asset correlation dynamics: Impact for specific investment strategies and portfolio risk", TSAM Europe Performance Measurement & Investment Risk, London, March 2014.

- "Stress-Szenarien für Risk Parity-Portfolien", Investor Circle, Zurich, December 2013.

- "New Methodological Answers to the New Normal in Risk and Investment Management", PRMIA Event, Frankfurt, November 2013.

- "Understanding the changing relationships in asset class correlation and the impact for trading FX", Trade Tech FX, London, September 2013.

Press coverage:

- Emmanuel Garessus, "Regain d'intérêt pour le contrôle du risque", Le Temps 13.10.2014

- Michael Ferber, "Die Entzauberung der «Risikokontroll-Fonds»", NZZ 20.6.2014

- "Systematische Handelsstrategien in Zeiten von QE & Co", e-fundresearch.com, 27.11.2014

CTI Project: Multi-Asset Investment Process using Bayes Ensembles of Trading Models