Implied correlation from VaR

TL;DR

This paper investigates how implied correlations derived from VaR calculations vary across different market conditions, revealing higher correlations during market crashes than booms.

Contribution

It introduces a method to measure implied correlation from VaR and provides empirical evidence of its variability during different market events.

Findings

Implied correlation increases during market crashes.

Correlation is not constant and varies with market conditions.

Higher correlations are observed in the left tail of the distribution.

Abstract

Value at risk (VaR) is a risk measure that has been widely implemented by financial institutions. This paper measures the correlation among asset price changes implied from VaR calculation. Empirical results using US and UK equity indexes show that implied correlation is not constant but tends to be higher for events in the left tails (crashes) than in the right tails (booms).