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Final Presentation

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  1. Final Presentation Mingwei Lei Econ 201

  2. Research Idea • Past research have shown evidence of high asset correlations in the period of heightened market volatility: • Campbell, Koedijk, and Kofman- 2002 • Butler Joaquin • This phenomenon is also well known in the business industry • Empirical exploration of the relationship between asset returns correlation and market (SPY) volatility

  3. The Process • Pair up stocks to be analyzed along with SPY • Match up data of stocks and SPY • Partition data into periods (1-day, 5-days, 20 days) to be analyzed • Find the optimal sampling frequency to calculate returns correlation for each partition • Plot correlation against market standard deviation • Perform transformations (log, Fisher) to attain a more linear relationship • Perform regression analysis

  4. Correlation Signature (Period- 1 day)

  5. Correlation Signature (Period- 5 days)

  6. Correlation Signature (Period- 20 days)

  7. BAC & GS Correlation vs. Market Standard Deviation (Period – 1 day)

  8. BAC & GS Correlation vs. Ln(MktStd) (Period – 1 day)

  9. BAC & GS Fisher Transformed Correlation vs. MktStd (Period – 1 day)

  10. BAC & GS Fisher Transformed Corr vs. Ln(MktStd) (Period – 1 day)

  11. BAC & GS Correlation vs. Market Standard Deviation (Period – 5 days)

  12. BAC & GS Correlation vs. Ln(MktStd) (Period – 5 days)

  13. BAC & GS Fisher Transformed Correlation vs. MktStd (Period – 5 days)

  14. BAC & GS Fisher Transformed Corr vs. Ln(MktStd) (Period – 5 days)

  15. BAC & GS Correlation vs. Market Standard Deviation (Period – 20 days)

  16. BAC & GS Correlation vs. Ln(MktStd) (Period – 20 days)

  17. BAC & GS Fisher Transformed Correlation vs. MktStd (Period – 20 days)

  18. BAC & GS Fisher Transformed Corr vs. Ln(MktStd) (Period – 20 days)

  19. Regression Results (Period- 1 day)

  20. Regression Results Cont. (Period- 1 day)

  21. Regression Results (Period- 5 days)

  22. Regression Results Cont. (Period- 5 days)

  23. Regression Results (Period- 20 days)

  24. Regression Results Cont. (Period- 20 days)

  25. Conclusions • The results definitely suggest that there exists a negative relationship between asset correlations and market volatility • Results imply that diversification works the least when it is needed the most • Portfolio managers and risk management practices must allow for time variant asset correlations and understand how asset correlations change with the market