Take a look at this Great Graphic. It is some interesting work by a former colleague at HSBC, Stacy Williams. These large correlation matrices. The first is from 2005, pre-Lehman. It is hard to call that period normal as, it is clear, with the benefit of hindsight, that the seeds of the crisis were already planted. The second is from this month.
The red coloring represent high positive correlations between asset classes. The blue are strong inverse correlations. The other colors denote weaker relationships.
Click on the charts to enlarge them. The important take away is of course that there is a great deal more red on the lower chart, showing that many asset classes are more correlated than previously. Among other things this makes the Holy Grail of investing, namely diversification, more difficult to achieve.
In the foreign exchange market, we have noted, a breakdown in the euro's correlation with the US S&P 500 from a record 0.85 in early December 2011 to a low of last week of 0.43 (60-day % change).
Great Graphic: Asset Market Correlations
Reviewed by Marc Chandler
on
April 20, 2012
Rating:
Reviewed by Marc Chandler
on
April 20, 2012
Rating:
