Final Presentation Mingwei Lei Econ 201.

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Final Presentation Mingwei Lei Econ 201

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

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

Correlation Signature (Period- 1 day)

Correlation Signature (Period- 5 days)

Correlation Signature (Period- 20 days)

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

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

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

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

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

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

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

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

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

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

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

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

Regression Results (Period- 1 day) Regressand Regressor β1 t-stat β0 R2 BAC and GS Corr ln(MktStd) 0.148 17.55 1.140 28.39 0.0955 Fisher Corr MktStd 15.51 14.05 0.362 28.40 0.1083 0.229 18.11 1.600 26.20 0.1200 JPM & GS 0.134 15.77 1.098 27.36 0.0835 14.15 13.66 .416 34.43 0.0908 0.214 16.51 1.572 25.06 0.1058

Regression Results Cont. (Period- 1 day) Regressand Regressor β1 t-stat β0 R2 WMT and JPM Corr ln(MktStd) 0.1563 18.68 1.086 27.76 0.1019 Fisher Corr MktStd 13.94 14.27 0.255 21.67 0.1028 0.2070 18.54 1.373 25.92 0.1151 WMT and KO 0.1475 15.29 0.983 21.59 0.0851 12.96 12.11 0.189 15.32 0.0915 0.1877 15.55 1.206 21.02 0.0975 WMT and VZ 0.1954 22.66 1.243 30.42 0.1634 16.0287 14.39 0.192 15.05 0.1496 0.2469 21.97 1.53 28.30 0.1768

Regression Results (Period- 5 days) Regressand Regressor β1 t-stat β0 R2 BAC and GS Corr ln(MktStd) 0.1290 9.50 0.956 17.79 0.1131 Fisher Corr MktStd 5.507 7.73 0.391 20.23 0.1150 0.1878 10.01 1.248 16.52 0.1348 JPM & GS 0.1004 8.42 0.881 18.44 0.0860 4.420 7.89 0.462 28.85 0.0829 0.1537 8.85 1.161 10.45 0.1014

Regression Results Cont. (Period- 5 days) Regressand Regressor β1 t-stat β0 R2 WMT and JPM Corr ln(MktStd) 0.1233 10.17 0.832 17.82 0.1336 Fisher Corr MktStd 4.688 8.82 0.275 18.17 0.1341 0.1531 10.31 0.976 16.84 0.1431 WMT and KO 0.1242 8.78 0.768 13.97 0.1298 4.822 6.36 0.194 10.11 0.1463 0.1504 8.65 0.889 13.02 0.1439 WMT and VZ 0.1725 13.14 0.987 18.91 0.2462 6.185 10.57 0.195 12.70 0.2426 0.210 12.88 1.156 17.68 0.2679

Regression Results (Period- 20 days) Regressand Regressor β1 t-stat Β0 R2 BAC and GS Corr ln(MktStd) 0.1314 5.74 0.869 11.64 0.1338 Fisher Corr MktStd 2.763 5.21 0.380 12.35 0.1343 0.186 6.10 1.098 10.80 0.1562 JPM & GS 0.0843 4.60 0.763 11.98 0.0858 1.980 5.44 0.470 22.13 0.0910 0.1316 5.03 0.979 10.67 0.1030

Regression Results Cont. (Period- 20 days) Regressand Regressor β1 t-stat β0 R2 WMT and JPM Corr ln(MktStd) 0.1229 6.69 0.735 12.59 0.2021 Fisher Corr MktStd 2.266 6.81 0.264 13.15 0.1908 0.1470 6.84 0.836 11.99 0.2084 WMT and KO 0.1240 5.90 0.672 9.92 0.2040 2.426 5.95 0.180 8.73 0.2299 0.1463 5.80 0.756 9.20 0.2149 WMT and VZ 0.1618 8.12 0.828 12.39 0.3351 3.156 11.44 0.183 10.92 0.3666 0.1947 8.06 0.951 11.70 0.3593

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