Correlation For Traders and Investors
Quantitative finance. today we’ll be discussing what correlation is and why right now and why investors might care. keep watching till the end of the video falls in stock market correlation. ok so right now in june 2020 the s&p 500 index’s three-month realized correlation has even though other gauges of market stress such as the vix index has investors continue to focus
On just one main driver – the global coronavirus essentially it means that all stocks are rising and falling together and it statistical measure that indicates the extent to which two or more variables related to one another. a positive correlation indicates the correlation indicates the extent to which one variable increases as the variables are uncorrelated there’s no
Linear relationship between them. way is based on my newest book which is called statistics for the trading floor to it in the description of the video below if you’re interested. you can correlation began the year with a value of around point to the gauge of how to 0.85 in mid-march the peak of the coronavirus sell off before steadying signify that all stocks are moving
In precise lockstep with each other during of index funds or quantitative trading algorithms that rely on historical argued that something was broken in the pricing and capital allocation functions together trading like the same stock this time the argument is different that in february there was an economy then in march the economy shut down and economy than different
Companies will have different earnings but if there’s better off if there is an economy than if there isn’t your bet on whether there any particular company’s stock is over or under priced particular differences essentially irrelevant this is of course an oversimplification the s&p this environment are of course performing better than the most hard-hit that index funds
Are fine in rising markets with high correlations but in management this outcome is far from ideal you were hoping for the market to could pick the ones that go up while index funds were forced to also hold the increasing correlations in early 2020 all companies were overwhelmed by the upon global government interventions one thing that sometimes confuses traders stay that
Way yet one asset might yield a + 50 percent return in a year while reason for this confusion is that traders often misunderstand what representing the general directional relationship between two assets if two goes up by 1% the second asset goes up by 5% and that ratio of 5 to 1 is producing 5 times the return of the first asset in addition to this there the same example
As above let’s say that the first asset lost 20 cents of value can still be an extremely high correlation coefficient common real-world example of this effect is levered etfs i made a video about underlying real estate etf yet ended up losing almost all of its value if you you would have actually made money so why does high correlation upset active spend more time worrying
About the things that affect all stocks rather which is usually what active managers focus on in particular fundamental more valuable than when they are high we’re having an accurate opinion on how trade correlation yes they can actually correlation trading is an advanced amongst the member stocks of a given stock market index the goal in trading of a particular index will
Be greater or less than the implied correlation level index and the stocks that make up the index due to the nature of equal to the average volatility of the individual securities that make up the greater the diversification benefits and the lower the overall portfolio will be a lot lower than the volatility of the individual index members and when to the average volatility
Of the individual securities that make up the basket of options on the individual stocks that make up the index or sell a constituents or sell a correlation swap to buy correlation a trader would just found this video useful check out my book on amazon which is linked to in the
Transcribed from video
Correlation For Traders and Investors | Statistics For the Trading Floor | Correlation Trading By Patrick Boyle
