Leif Peterson

Asset Class Correlations

The majority of correlation coefficients shown are actually not that good. When you get down to 0.2 - 0.6, the association between the pairs of variables can still be jumpy. In fact, if you showed the X-Y scatter plots for a number of these matrix elements, you would probably be surprised at how noisy, jumpy and unrelated a lot of the series are. X-Y scatter plots would likely reveal problems and cause readers to ask why you tried to correlate a lot of these pair-vectors in the first place. At values of r=0.8 (-0.8) you will truly begin to see very tight patterns and tight trending between the data being correlated. The goal is to focus on high negative correlation, and the large negative correlation between the dollar and gold is actually good, since you would want to load a portfolio with something that is going to go up, on average, when the dollar goes down. (remember, though, gold is a commodity so the price is inflated in the direction in which the speculative buyers/sellers think it will go. ). Again, the majority of the coefficients are near-zero and low (less than r=0.2 or greater than r=-0.2) and uninteresting. Last, you are probably showing Pearson correlation, which can be biased by outlier pairs. Try using Spearman correlation, which is not biased by outliers.