Real-World Correlation Calibration: Calibration and Validation of Correlation Targets
Document ID: 2009-1502 (previously 2009/07)
Published on: 8th July 2009
Author: Ruosha Li & Frederic El Cherif
Note: this article has been updated - you can view the updated article here.
We have recently updated our correlation targets for real and nominal bond returns with excess equity return and real and nominal interest rate with excess equity return. In this note, we explain our methodology for calibrating these correlations in our real-world ESG models. We validate the new (and old) correlation targets using the end March 2009 calibration using both equity constant volatility and SVJD equity models. We also analyse the impact of the calibration on correlation of returns on different assets which are not explicitly targeted in our ESG models. This calibration and validation report will be produced every year following the re-calibration to updated cross asset return correlation targets. This will usually take place before the end Q2 calibration.
