Monday, 13 September 2010

correlation chart

despite the recent commentary on how correlation is, and how this MUST be caused by high frequency trading its quite interesting to look at correlation on a longer term basis. The Raven created a pseudoDow (which is subject to survivor bias, but much quicker to do calculatons on) and calculated a rolling two year "correlation" on the monthly returns. Instead of taking an average of the correlation matrix coefficients he used an approximation from the calculation of the dispersion. The difference is a couple of point of correlation at most, so the general shape of the chart shouldn't be missing too much.

The key takeaway from this is though, that while correlation may be high, its certainley not freakish or out of historical norms, and the panic in the media with respect to HFT overdone and ill informed to say the least.

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