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What is Discordance

Chapter 167
Encyclopedia of Business Analytics and Optimization
If the changes of two random variables are in the opposite direction (i.e., one increases and the other decreases), there is discordance between the two changes.
Published in Chapter:
Portfolio Optimization using Rank Correlation
Chanaka Edirisinghe (University of Tennessee, USA) and Wenjun Zhou (University of Tennessee, USA)
Copyright: © 2014 |Pages: 14
DOI: 10.4018/978-1-4666-5202-6.ch167
Abstract
A critical challenge in managing quantitative funds is the computation of volatilities and correlations of the underlying financial assets. We present a study of Kendall's t coefficient, one of the best-known rank-based correlation measures, for computing the portfolio risk. Incorporating within risk-averse portfolio optimization, we show empirically that this correlation measure outperforms that of Pearson's in our out-of-sample testing with real-world financial data. This phenomenon is mainly due to the fat-tailed nature of stock return distributions. We also discuss computational properties of Kendall's t, and describe efficient procedures for incremental and one-time computation of Kendall's rank correlation.
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