Two assets have unconditional correlation 0.4 under the model of Proposition 14.11. (a) What correlation will you measure on calm days where the variance of the first asset is a quarter of its unconditional variance? (b) On crisis days where it is four times? (c) What does this imply for a desk that estimates correlations on the last six calm months?
M14 · Problem 9 ★ Check
Conditional correlation
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