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Keywords:

  • cointelation;
  • inferred correlation;
  • measured correlation;
  • cointegration;
  • correlation term structure

Abstract

This paper comes together with growing evidence for power law-type scaling of correlation with time, a concept rooted in the original study by Benoit Mandelbrot on concentration of risk. We complete the cointelation model recently introduced via a statistical test, which uses measured correlation in different time gaps. We also provide an approximation of the expectation in the change in measured correlation via these various time steps and use our findings in order to introduce the concept of inferred correlation and the term structure of correlation. We finally illustrate our findings through the example of the relation between oil and BP, and present a few potential applications in the financial industry.