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
Date Written: May 22, 2013
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: Suggested Citation