Correlation_Volatility_2assets

Calculating Correlation and Volatility of two assets - A and B

Lambda is an arbitrary decay parameter
This code needs file AB.txt which is within this repository

#include "stdafx.h"
#using <mscorlib.dll>
#include <iostream>
#include <fstream>
#include <iomanip>
#include <vector>
#include <cmath>
using namespace System;
using namespace std;

int main() {
	double lambda = 0.84;			// Lambda is an arbitrary decay parameter
	int i = 0;				// Counters
	double n1, n2;
	ifstream  inPrices;
	ofstream outPrices;
	inPrices.open("AB.txt");
	outPrices.open("Prices.txt");
	vector<double> Price1;
	vector<double> Price2;

	// Read in raw prices for asset A and asset B, Price1[] and Price2[], from external
	// text file AB.txt and write both prices to a separate file titled Prices.txt
	while (!inPrices.eof()) {
		inPrices >> n1 >> n2;
		Price1.push_back(n1);
		Price2.push_back(n2);
		i++ ;
	}

	// Get the size of the resulting price vectors and set return vectors, n
	int n = Price1.size();
	vector<double> Ret1(n-1);
	vector<double> Ret2(n-1);

	// Calculate log returns for both sets of prices, Ret1[] and Ret2[]
	for (int i=0; i<=n-2; i++) {
		Ret1[i] = log(Price1[i]/Price1[i+1]);
		Ret2[i] = log(Price2[i]/Price2[i+1]);
	}
	// Calculate the weights for the risk modelling, W[i]
	double temp;
	vector<double> T(n);
	vector<double> W(n);
	double sumW = 0.0;
	for (int i=0; i<=n-2; i++) {
		T[i] = pow(lambda, i);
		sumW = sumW + T[i];
	}
	for (int i=0; i<=n-2; i++) {
		W[i] = T[i] / sumW;
	}

	// Next we calculate the volatility, vol1 and vol2 and
	// the covariance, cov
	double vol1 = 0.0;
	double vol2 = 0.0;
	double corr = 0.0;
	double cov = 0.0;
	for (int i=0; i<=n-2; i++) {
		vol1 = vol1 + W[i]*pow(Ret1[i],2); 
		vol2 = vol2 + W[i]*pow(Ret2[i],2);
		cov  = cov  + W[i]*Ret1[i]*Ret2[i];
	}

	// Next we calculate the correlation, corr
	corr = cov / sqrt(vol1) / sqrt(vol2);

	// Output the results to the console
	cout << "Volatility of asset A is " << endl;
	cout << endl;
	cout << sqrt(vol1) << "  or  " << sqrt(vol1)*100 << " %" << endl;
	cout << endl;
	cout << "Volatility of asset B is " << endl;
	cout << endl;
	cout << sqrt(vol2) << "  or  " << sqrt(vol2)*100 << " %" << endl;
	cout << endl;
	cout << "Covariance between asset A and asset B is " << cov << endl;
	cout << endl;
	cout << "Correlation between asset A and asset B is " << corr << endl;
	cout << endl;
}