Calculating Correlation Conditional on Negative Returns

Summary

The document asks how to measure the relationship between two financial return series specifically during periods when the first series has a negative return. It proposes selecting those observations and calculating Pearson correlation on the filtered data, seeking confirmation of that approach.

No answer, worked example, or empirical evidence is included, so the question leaves important methodological choices unresolved. In particular, the result depends on which series defines the downside condition, the return sampling interval, and whether the goal is descriptive conditional correlation or a broader measure of downside dependence. Filtering observations may be a useful starting point, but the document does not establish that it captures tail dependence or causal effects.

Key ideas

• The question defines downside periods as those when the first series has negative returns.
• It proposes computing Pearson correlation using only observations from those periods.
• The document does not provide an answer, example, or evidence validating the method.

Tags

# Calculating the downside correlation between two time series


# Calculating the downside correlation between two time series












If I have two financial time series and I want to calculate the correlation between them when series1 gives me a negative returns, would that be as simple as picking only those periods where series1 returns are negative and calculating the Pearsons correlation between them? Sorry if its a very basic question as I come from non-stat background.

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