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The Pearson Correlation Model – Work of the Devil?

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  • Huyền, Nguyễn Thanh Thanh

Abstract

While by far the most applied correlation model in finance, the Pearson correlation model is – due to its simplicity and linearity – also the most heavily criticised: “Anything that relies on correlation is charlatanism” (Nassim Taleb) and “Instruments whose pricing requires the input of correlation … are accidents waiting to happen” (Paul Wilmott). In this chapter we address this contradiction and evaluate whether the Pearson correlation approach is rigorous and suitable for modelling associations in finance.

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  • Huyền, Nguyễn Thanh Thanh, 2015. "The Pearson Correlation Model – Work of the Devil?," OSF Preprints 2mpwh, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:2mpwh
    DOI: 10.31219/osf.io/2mpwh
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