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

Financial Markets and Portfolio Management, 29, 2. 125-147, 2015

Posted: 21 Apr 2013 Last revised: 1 May 2015

See all articles by Jochen Papenbrock

Jochen Papenbrock

Firamis

Peter Schwendner

Zurich University of Applied Sciences, Center for Asset Management

Date Written: May 22, 2013

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

Suggested Citation

Papenbrock, Jochen and Schwendner, Peter, Handling Risk On/Risk Off Dynamics with Correlation Regimes and Correlation Networks (May 22, 2013). Financial Markets and Portfolio Management, 29, 2. 125-147, 2015. Available at SSRN: https://ssrn.com/abstract=2254272 or http://dx.doi.org/10.2139/ssrn.2254272

Jochen Papenbrock

Firamis ( email )

Robert-Kempner-Ring 27
Oberursel, 61440
Germany
+49 174 143 5555 (Phone)

HOME PAGE: http://www.firamis.de

Peter Schwendner (Contact Author)

Zurich University of Applied Sciences, Center for Asset Management ( email )

School of Management and Law
Technoparkstrasse 2
Winterthur, CH 8401
Switzerland

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