Final Presentation MINGWEI LEI ECON 201 Research Idea

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(Mkt. Std) (Period – 1 day)

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

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

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

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

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

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

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

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

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

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

Regression Results (Period- 1 day) BAC and GS JPM & GS Regressand Regressor β 1 t-stat β 0 t-stat R 2 Corr ln(Mkt. Std) 0. 148 17. 55 1. 140 28. 39 0. 0955 Fisher Corr Mkt. Std 15. 51 14. 05 0. 362 28. 40 0. 1083 Fisher Corr ln(Mkt. Std) 0. 229 18. 11 1. 600 26. 20 0. 1200 Corr ln(Mkt. Std) 0. 134 15. 77 1. 098 27. 36 0. 0835 Fisher Corr Mkt. Std 14. 15 13. 66 . 416 34. 43 0. 0908 Fisher Corr ln(Mkt. Std) 0. 214 16. 51 1. 572 25. 06 0. 1058

Regression Results Cont. (Period- 1 day) WMT and JPM WMT and KO WMT and VZ Regressand Regressor β 1 t-stat β 0 t-stat R 2 Corr ln(Mkt. Std) 0. 1563 18. 68 1. 086 27. 76 0. 1019 Fisher Corr Mkt. Std 13. 94 14. 27 0. 255 21. 67 0. 1028 Fisher Corr ln(Mkt. Std) 0. 2070 18. 54 1. 373 25. 92 0. 1151 Corr ln(Mkt. Std) 0. 1475 15. 29 0. 983 21. 59 0. 0851 Fisher Corr Mkt. Std 12. 96 12. 11 0. 189 15. 32 0. 0915 Fisher Corr ln(Mkt. Std) 0. 1877 15. 55 1. 206 21. 02 0. 0975 Corr ln(Mkt. Std) 0. 1954 22. 66 1. 243 30. 42 0. 1634 Fisher Corr Mkt. Std 16. 0287 14. 39 0. 192 15. 05 0. 1496 Fisher Corr ln(Mkt. Std) 0. 2469 21. 97 1. 53 28. 30 0. 1768

Regression Results (Period- 5 days) BAC and GS JPM & GS Regressand Regressor β 1 t-stat β 0 t-stat R 2 Corr ln(Mkt. Std) 0. 1290 9. 50 0. 956 17. 79 0. 1131 Fisher Corr Mkt. Std 5. 507 7. 73 0. 391 20. 23 0. 1150 Fisher Corr ln(Mkt. Std) 0. 1878 10. 01 1. 248 16. 52 0. 1348 Corr ln(Mkt. Std) 0. 1004 8. 42 0. 881 18. 44 0. 0860 Fisher Corr Mkt. Std 4. 420 7. 89 0. 462 28. 85 0. 0829 Fisher Corr ln(Mkt. Std) 0. 1537 8. 85 1. 161 10. 45 0. 1014

Regression Results Cont. (Period- 5 days) WMT and JPM WMT and KO WMT and VZ Regressand Regressor β 1 t-stat β 0 t-stat R 2 Corr ln(Mkt. Std) 0. 1233 10. 17 0. 832 17. 82 0. 1336 Fisher Corr Mkt. Std 4. 688 8. 82 0. 275 18. 17 0. 1341 Fisher Corr ln(Mkt. Std) 0. 1531 10. 31 0. 976 16. 84 0. 1431 Corr ln(Mkt. Std) 0. 1242 8. 78 0. 768 13. 97 0. 1298 Fisher Corr Mkt. Std 4. 822 6. 36 0. 194 10. 11 0. 1463 Fisher Corr ln(Mkt. Std) 0. 1504 8. 65 0. 889 13. 02 0. 1439 Corr ln(Mkt. Std) 0. 1725 13. 14 0. 987 18. 91 0. 2462 Fisher Corr Mkt. Std 6. 185 10. 57 0. 195 12. 70 0. 2426 Fisher Corr ln(Mkt. Std) 0. 210 12. 88 1. 156 17. 68 0. 2679

Regression Results (Period- 20 days) BAC and GS JPM & GS Regressand Regressor β 1 t-stat Β 0 t-stat R 2 Corr ln(Mkt. Std) 0. 1314 5. 74 0. 869 11. 64 0. 1338 Fisher Corr Mkt. Std 2. 763 5. 21 0. 380 12. 35 0. 1343 Fisher Corr ln(Mkt. Std) 0. 186 6. 10 1. 098 10. 80 0. 1562 Corr ln(Mkt. Std) 0. 0843 4. 60 0. 763 11. 98 0. 0858 Fisher Corr Mkt. Std 1. 980 5. 44 0. 470 22. 13 0. 0910 Fisher Corr ln(Mkt. Std) 0. 1316 5. 03 0. 979 10. 67 0. 1030

Regression Results Cont. (Period- 20 days) WMT and JPM WMT and KO WMT and VZ Regressand Regressor β 1 t-stat β 0 t-stat R 2 Corr ln(Mkt. Std) 0. 1229 6. 69 0. 735 12. 59 0. 2021 Fisher Corr Mkt. Std 2. 266 6. 81 0. 264 13. 15 0. 1908 Fisher Corr ln(Mkt. Std) 0. 1470 6. 84 0. 836 11. 99 0. 2084 Corr ln(Mkt. Std) 0. 1240 5. 90 0. 672 9. 92 0. 2040 Fisher Corr Mkt. Std 2. 426 5. 95 0. 180 8. 73 0. 2299 Fisher Corr ln(Mkt. Std) 0. 1463 5. 80 0. 756 9. 20 0. 2149 Corr ln(Mkt. Std) 0. 1618 8. 12 0. 828 12. 39 0. 3351 Fisher Corr Mkt. Std 3. 156 11. 44 0. 183 10. 92 0. 3666 Fisher Corr ln(Mkt. Std) 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