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Major tracking error today; Yen is down against the dollar, but all the ETFs (e.g. FXY) are up... Arbitrage opportunity? Mar 17, 2011
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Highest Correlation of Equity Markets and the Dollar in Decades? Or, Just Sloppy Statistics?
Take a look at the Wall Street Journal article entitled “Stocks, Dollar in Rare Sync” that appeared in the October 29^{th} issue of the publication. The article quoted a “quantitative research analyst” who reportedly described the recent correlation between equities and the dollar as “astonishing”, saying that he hasn’t seen such a relationship since 1971.
How is this analyst calculating these “correlations”? From a review of available data, it seems that he is using the time series of S&P 500 and the US Dollar Index (USDX) prices. He does not appear to be using the returns of these assets. Whoever created the charts that appear in the article appears to be ignoring the statistical problems that arise from using time series data that have a high degree of autocorrelation.
For instance, the correlation of 4month moving average price data (i.e. simply running a correlation of the SPY price and the USDX) does, in fact, yield the 0.80 correlation that is described. When one runs a DurbinWatson test on this data, however, one finds that the correlation is not as meaningful as assumed – the overlapping daytoday prices have a high degree of positive autocorrelation, rendering dubious the significance of the high (negative) correlation.
Nevertheless, when one runs a correlation of the daily returns (avoiding the problems of positive autocorrelation), there is still reasonable negative correlation. Maybe not 0.80, but .20. This level of correlation between SPY and USDX, however, is much more common than the article suggests. Not once in four decades, but rather once every few years. And, over the last few weeks, the correlation has dissolved to near zero – in other words, the two assets are now completely uncorrelated.
Disclosure: Long or Short SPY, Currency ETFs, from time to time
Is There Any Value to the Put/Call Ratio?
Disclosure: Short SPY
Very High PutCall Ratio on September 7th