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Cross-Asset Correlations

Cross-Asset Correlations

A cross-asset correlation measures the degree to which the price of a financial instrument is affected by a change in the price of another instrument of a different asset class.

 

The globalization of the economy and the unification of the world financial markets into a common area of investment opportunities are the drivers of the increased cross-asset correlations we are witnessing the past 20 years.

Defining Correlation:

In general, a correlation between two variables expresses an average relationship that is backed with historical data. The correlation coefficient receives values between -1.0 and +1.0, and that means:

  • +1.0 is the perfect correlation reflecting identical movements / directions

  • -1.0 is the perfect negative coefficient reflecting identical opposite directions

What is a Cross-Asset Correlation?

A cross-asset correlation is a relationship between two instruments belonging in different asset classes. After the global financial crisis of 2008, there is a significant increase of cross-asset correlations between equities, Forex currencies, commodities, credit, and interest rate products.

Uncertainty Enforces the Correlation Effect

When the macro outlook changes dramatically, the financial markets tend to adjust rapidly their risk/return combinations seeking a new balance. Moreover, increased cross-asset correlations appear between Currencies, Gold, Energy prices, Credit, and Equities.

During periods of macro uncertainty, investors tend to see equities, soft commodities, energies,and corporate bonds as sources of unwanted portfolio risk. Hence, they sell simultaneously all these asset classes. The price of these asset classes moves consequently in sync. This phenomenon creates an increased relationship between macro uncertainty, volatility, and cross-market correlations. In the following chart by JP Morgan, we can see exactly how increased volatility results in high cross-market correlations.

Chart: The relation between Volatility, Alpha, and Cross-Market Correlations

During periods of macro uncertainty, investors tend to see equities, soft commodities, energies,and corporate bonds as sources of unwanted portfolio risk. Hence, they sell simultaneously all these asset classes. The price of these asset classes moves consequently in sync. This phenomenon creates an increased relationship between macro uncertainty, volatility, and cross-market correlations.

These are some basic conclusions:

  • More VOLATILITY (↑) → More Correlation (↑)

  • Less VOLATILITY (↓) → Less Correlation (↓)

  • More ALPHA (↑) →Less Correlation (↓)

  • Less ALPHA (↓) → More Correlation (↑)

Read more: Cross-Asset Correlations

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-Forex Calendar-

 (Based on Research starting January 2000 and ending September 2013)

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   EUR/USD  GBP/USD  USD/JPY USD/CAD  EUR/CHF  AUD/USD
AVERAGE EURUSD CHANGE TIMES (↑ - ↓) AVERAGE GBPUSD CHANGE TIMES (↑ - ↓) AVERAGE USDJPY CHANGE TIMES (↑ - ↓) AVERAGE USDCAD CHANGE TIMES (↑ - ↓) AVERAGE EURCHF CHANGE TIMES (↑ - ↓) AVERAGE AUDUSD CHANGE TIMES (↑ - ↓)
1. PER MONTH      
JANUARY -0.8% 6↑ - 8↓ 0.0% 6↑ - 7↓ 0.6% 9↑ - 5↓ 0.0% 8↑ - 6↓ 0.4% 8↑ - 6↓ -0.2% 6↑ - 8↓
FEBRUARY -0.3% 7↑ - 7↓ -1.0% 6↑ - 8↓ 0.8% 8↑ - 6↓ 0.2% 6↑ - 7↓ -0.4% 4↑ - 10↓ 0.2% 9↑ - 5↓
MARCH 0.3% 7↑ - 7↓ -0.2% 8↑ - 6↓ 0.8% 9↑ - 5↓ -0.2% 6↑ - 8↓ 0.0% 10↑ - 4↓ 0.0% 7↑ - 7↓
APRIL 0.7% 7↑ - 7↓ 1.3% 12↑ - 2↓ 0.2% 6↑ - 8↓ -1.1% 4↑ - 10↓ 0.2% 6↑ - 8↓ 1.8% 11↑ - 3↓
MAY -0.5% 6↑ - 8↓ -0.5% 4↑ - 10↓ -0.5% 5↑ - 9↓ -0.7% 6↑ - 8↓ -0.3% 6↑ - 8↓ -0.9% 4↑ - 10↓
JUNE 0.6% 9↑ - 5↓ 0.8% 9↑ - 5↓ 0.1% 8↑ - 6↓ 0.2% 5↑ - 9↓ -0.5% 6↑ - 8↓ 0.6% 9↑ - 5↓
JULY 0.1% 6↑ - 8↓ 0.5% 7↑ - 7↓ -0.3% 8↑ - 6↓ -0.2% 7↑ - 7↓ -0.3% 7↑ - 7↓ 0.4% 7↑ - 7↓
AUGUST -0.3% 8↑ - 6↓ -0.9% 5↑ - 9↓ -1.4% 4↑ - 10↓ 0.1% 6↑ - 8↓ -0.3% 6↑ - 8↓ -1.0% 4↑ - 10↓
SEPTEMBER 0.8% 7↑ - 6↓ 0.4% 8↑ - 5↓ -0.2% 7↑ - 6↓ -0.4% 5↑ - 8↓ 0.4% 8↑ - 5↓ -0.1% 7↑ - 6↓
OCTOBER -0.5% 7↑ - 6↓ 0.1% 8↑ - 5↓ -0.9% 5↑ - 8↓ 0.6% 7↑ - 6↓ -0.8% 6↑ - 7↓ 0.4% 10↑ - 3↓
NOVEMBER 0.5% 7↑ - 6↓ -0.6% 4↑ - 9↓ -0.2% 6↑ - 7↓ -0.3% 5↑ - 8↓ -0.3% 5↑ - 8↓ 0.4% 8↑ - 5↓
DECEMBER 1.9% 8↑ - 5↓ 0.4% 5↑ - 8↓ 0.9% 7↑ - 6↓ -0.2% 6↑ - 7↓ -0.5% 7↑ - 6↓ 1.3% 7↑ - 6↓
2. PER SEMESTER
A' SEMESTER 0.1% 7↑ - 7↓ 0.3% 9↑ - 5↓ 2.0% 9↑ - 5↓ -1.6% 7↑ - 7↓ -0.6% 7↑ - 7↓ 1.6% 8↑ - 6↓
B' SEMESTER 2.2% 9↑ - 4↓ -0.3% 7↑ - 6↓ -2.9% 5↑ - 8↓ -0.8% 6↑ - 7↓ -0.9% 6↑ - 7↓ 2.5% 7↑ - 6↓
3. PER QUARTER          
A' QUARTER -2.8% 4↑ - 0↓ -4.4% 5↑ - 9↓ 7.8% 11↑ - 3↓ 0.1% 9↑ - 5↓ -0.1% 8↑ - 6↓ 0.2% 9↑ - 5↓
B' QUARTER 2.9% 4↑ - 0↓ 5.6% 9↑ - 5↓ -0.7% 6↑ - 8↓ -5.7% 6↑ - 8↓ -1.9% 6↑ - 8↓ 5.3% 8↑ - 6↓
C' QUARTER 1.8% 2↑ - 2↓ -0.2% 8↑ - 6↓ -6.8% 6↑ - 8↓ -1.8% 8↑ - 6↓ -0.8% 7↑ - 7↓ -2.5% 8↑ - 6↓
D' QUARTER 6.3% 4↑ - 0↓ -0.5% 7↑ - 6↓ -0.9% 6↑ - 7↓ 0.3% 5↑ - 8↓ -5.2% 3↑ - 10↓ 7.0% 10↑ - 3↓
4. PER SEASON           
AUTUMN 2.6% 8↑ - 5↓ -0.5% 8↑ - 5↓ -4.5% 6↑ - 7↓ -0.3% 7↑ - 6↓ -2.3% 6↑ - 7↓ 2.3% 8↑ - 5↓
WINTER 2.6% 6↑ - 8↓ -2.4% 7↑ - 7↓ 7.8% 8↑ - 6↓ -0.1% 7↑ - 7↓ -1.7% 9↑ - 5↓ 4.5% 8↑ - 6↓
SPRING 1.6% 7↑ - 7↓ 2.1% 7↑ - 7↓ 1.8% 9↑ - 5↓ -6.8% 7↑ - 7↓ -0.4% 5↑ - 9↓ 3.2% 7↑ - 7↓
SUMMER 1.3% 9↑ - 5↓ 1.3% 8↑ - 6↓ -5.7% 3↑ - 11↓ 0.1% 9↑ - 5↓ -3.6% 6↑ - 8↓ 0.0% 7↑ - 7↓

Source: CurrenciesFx.com Research 2000-2013

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