Dr. Gunter Meissner erklärt warum Korrelation eines der meist missverstandenen Worte in der Finanzindustrie ist – und warum das Gefahr bedeutet

Dr. Gunter Meissner, Experte auf dem Gebiet des “Correlation Risk Modeling”, spricht mit Thomas Belkin, Vice President Buy Side Business Development bei Eurex, darüberwie Korrelation zu einem der meist missverstandenen Begriffe in der Finanzwelt wurde und warum die Finanzkrise ein hilfreicher Katalysator bei der Profilierung des Risk Management war. Dr. Meissner war Hauptredner bei einem kürzlich für Eurex Exchange-Kunden durchgeführten Seminar zum Thema Correlation Risk Modelling und Management. Ein oft übersehener Risikotyp bis zur Finanzkrise, ist Correlation Risk bei wichtigen Finanzinstituten in den Fokus des Risikomanagements, des Handels und des Investments gerückt.

Thomas Belkin: What are financial correlations and why are they critical in finance?
Dr. Gunter Meissner: Correlation is probably one of the most misunderstood terms in finance. In Statistical Theory the term ‘Correlation’ is narrowly defined and refers to the Pearson Correlation Coefficient. In finance, we define ‘Correlations’ typically broader and include other correlation concepts as ‘Binomial Correlations’, ‘Copula Correlations’, or ‘Stochastic Correlation’. In trading, the term correlation is used quite loosely and non-mathematically to describe the co-movement of assets, as in pairs trading. So when we talk about ‘correlation’, the first thing we have to do is make sure we agree on what we are actually talking about.

Thomas Belkin: In which financial areas are correlations critical?
Dr. Gunter Meissner: Correlations play a key role in many areas in finance including investing, trading, risk management, the global financial crisis and regulation. Correlations significantly impact the outcome in any of these areas. For example, the values for VaR (Value at Risk) or ES (Expected Shortfall) depend strongly on the correlation of the assets in the portfolio. Here, it is important to understand that correlations between the assets in a portfolio can change. This is ‘correlation risk’. We saw this in the global financial crisis in 2007 to 2009. Risk managers had assets in their portfolio which had a low or even negative correlation. This gave them the mistaken impression of little risk. However, in the global crisis, suddenly correlations increased, meaning many asset values decreased, leading to huge, unexpected losses.

Thomas Belkin: In what ways did the financial crisis bolster risk management?
Dr. Gunter Meissner: The global financial crisis highlighted the need to improve the soundness and shock-resilience of the international banking system. Basel III will implement short term and long term liquidity ratios, leverage ratios, and a ‘too big to fail’ penalty. Importantly, Basel III will implement CVA (Credit Value Adjustment) to address the counterparty risk in derivatives transactions. CVA includes two types of correlations: General and Specific wrong way risk (WWR). This is the risk of credit exposure and credit risk to increase at the same time. A multiplier is implemented to address these correlations. More sophisticated methods to deal with WWR are currently being developed. When Lehman defaulted in 2008, it had 1.5 million derivatives transaction with 8,000 different counterparties on their books. This highlights the importance of CVA.

Thomas Belkin: How can companies with various trading styles benefit from [integrating] correlation risk?
Dr. Gunter Meissner: Dispersion trading and pairs trading as well as correlation options (e.g. multi-asset options and quantos), and correlation swaps are plays on correlation. Currently methods are being developed to forecast correlations as stochastic correlation models.
Generally, trading companies should analyze the return correlation between the various desks with respect to the anticipated economic scenario to achieve an overall return outlook.

Thomas Belkin: How will the practice of risk management continue to evolve going forward?
Dr. Gunter Meissner: Generally, a companywide risk management which includes the correlation between the various departments’ desks should be implemented. This is still in its infancy.
More specifically, VAR (Value at Risk) will most likely lose its significance and ES (expected shortfall) will gain popularity. Expected shortfall measures tail risk, i.e. the size and probability of losses beyond a certain threshold. Loosely speaking VAR answers the question: “What is the maximum loss in good times?” Expected Shortfall answers the question, ”What is the loss in bad times?”

Thomas Belkin: You just released a new book. Can you give our readers a management summary?
Dr. Gunter Meissner: Correlation Risk Modeling and Management, is the first rigorous guide to the topic of correlation risk. A relatively overlooked type of risk until it caused major unexpected losses during the financial crisis of 2007 through 2009, correlation risk has become a major focus of the risk management departments in major financial institutions, particularly since Basel III specifically addressed correlation risk with new regulations. The book offers a rigorous explanation of the topic, revealing new and updated approaches to modeling and risk managing correlation risk. I think it is a timely release since it provides comprehensive coverage of a topic of increasing importance in the financial world.

Thomas Belkin: Thank you for your time.

For more information please contact Thomas Belkin T+1 312 544-1105 or via e-mail at: Thomas.Belkin@eurexchange.com

Dr. Gunter Meissner is the author of the new book, Correlation Risk Modeling and Management, which is an applied guide to the topic of correlation risk. He has held a number of academic positions at leading universities and is currently the President of Derivatives Software, Founder and CEO of Cassandra Capital Management and Adjunct Professor of Mathematical Finance at NYU-Courant. Prior to his recent academic posts, Dr. Meissner traded interest rate futures, swaps and options and served as Head of Product Development for Deutsche Bank, where he was responsible for originating algorithms for new derivatives products.