Correlation and Dependence in Risk Management

Embrechts, P., McNeil, A. J., & Straumann, D. (2002). Correlation and Dependence in Risk Management: Properties and Pitfalls. Risk Management: Value at Risk and Beyond.

Type

Book chapter

Intellectual base

Review or monograph

Year

2002

DOI

10.1017/cbo9780511615337.008

ISBN

9780521781800

Link

https://doi.org/10.1017/CBO9780511615337.008

Cited from

systems_cybernetics

Cited by

2 citations across 2 artifacts.

Each citation links to the sentence it supports in the citing article.

Primes

• Correlated Capacity Demand
  • The diversification illusion: pooling consumers reduces variance under independence, but under correlation the variance reduction collapses and the pooled load can be worse than the sum of marginal loads under certain rationing rules. Tail-correlation versus centre-correlation: two demand processes can be near-uncorrelated under normal conditions and strongly correlated in the tail, and the relevant correlation for capacity planning is the tail correlation, often much higher than linear-correlation estimates suggest — which is why copula models exist to capture it.

    This sourceShows linear correlation understates tail dependence, motivates copulas, and demonstrates that pooling under tail dependence can worsen rather than reduce joint-exceedance risk. (

Domain-specific

• Tail dependence
  • Financial or environmental interpretation must not infer causal linkage from a dependence statistic.

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