Orthant Probabilities for Robust Correlation and Structural Performance Enhancement
20 Pages Posted: 2 Sep 2015 Last revised: 8 Feb 2016
Date Written: September 1, 2015
Orthant probabilities applied in a two-dimensional framework are used to derive quadrant-conditional financial asset return correlations which fully capture both linear and non-linear components of co-variability. We investigate the potential for employing quadrant-conditional correlations in order to construct portfolios which generate a long-run average portfolio return which is more positive than long-run averages of individual assets’ returns. Risk-based, but return-enhancing security selection applications involving assets co-variability criteria for investment management and high-frequency arbitrage trading are discussed.
Keywords: orthant, probability, portfolio, optimization, Sheppard's theorem, correlation, regime, risk
JEL Classification: C14, C15, C61, G11
Suggested Citation: Suggested Citation