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What is Rank Correlation

Chapter 167
Encyclopedia of Business Analytics and Optimization
The correlation between two random variables measuring monotonic dependency. It is often computed based on the ranks of values in their own series. A high rank correlation means the two random variables tend to move to the same direction (i.e., increase or decrease) simultaneously.
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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Chapter 48
Copula-Based Multivariate Time Series Models
A scalar measure of dependence in the interval [-1, 1], the calculation of which is based on the ranks of the data observations alone.
Published in Chapter: Copula-Based Multivariate Time Series Models; From: Encyclopedia of Business Analytics and Optimization
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Chapter 13
Analysis of fluctuations in Credit-Deposit Ratio of Indian States: From Pre-Globalization to Post-Financial Crisis Phase
It is the degree of associations between two sets of observations where the observations are arranged in terms of ranks or gradations. It is thus the measure to capture the degree of associations among qualitative variables. The formula has been given in the methodology section.
Published in Chapter: Analysis of fluctuations in Credit-Deposit Ratio of Indian States: From Pre-Globalization to Post-Financial Crisis Phase; From: Handbook of Research on Managerial Thinking in Global Business Economics
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