The economic and financial shocks unleashed by the global coronavirus crisis have reordered risk profiles for markets in unexpected as well as expected ways. One of the shifts that should surprise no student of market history: the recent rise (and in some cases dramatic spikes) in return correlations.
As the historical record clearly shows, return correlations (a staple in risk analytics for portfolio design) tend to rise in market corrections. That’s certainly been true for the major asset classes this year.
Let’s begin with a proxy that summarizes correlations for the major asset classes via the median data for a rolling 1-year window. In recent weeks the correlation has surged, rising sharply and suddenly in March to around 0.50 from the low-0.30 range. (Note: correlation readings range from -1.0 (perfect negative correlation) to zero (no correlation) to +1.0 (perfect positive correlation.)
ETF Proxies Of Major Asset Classes
Profiling the broad sweep of assets masks some…