Below we show the one year correlation of selected global equity indices with the Dow Jones Industrial Average, and how it has changed over the past ten years. Figures for the chart are calculated in the same way as a moving average, think of it as moving correlation. If the illustration is too busy or confusing, the table highlights the current correlation as it appears at the end of the chart. With the current correlation figures we also include the change in correlation since the bull market in US stocks began.
As we would expect, the S&P 500 is, and has been, most correlated to the Dow over the entire period. Most recently Mexico and Brazil have undergone the largest increase in correlation, while the Asian markets remain largely uncorrelated to the US.
The above table and figures are one year correlation numbers. Shown below is a matrix of the same world indices and how they are correlated to one-another. The correlation numbers shown in the matrix are since 3/3/03, the beginning of the bull market in the MSCI World Index.
When you calculated the correlation between indices, did you use dollar-denominated figures or figures based in the home-country currencies?
(i.e. did you factor out exchange rate flucuations or do they cloud the results?)
Thanks
Posted by: DP | June 21, 2007 at 08:26 AM
DP:
The correlation is calculated off of daily percent change. The historical prices for each index are consistent with their home currency. IE: Stoxx 50 is calculated in Euros. Looking at the percent change then smoothes any differences that price or currency could create.
Posted by: Cleve | June 21, 2007 at 09:14 AM
Excellent article! Very informative.
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