rudi

Capitalization Coupling: Major Indices at Correlation Highs

Michael,

I replicated a part of your study. I selected DIA/IWM since it has the highest volatility and correlation. I used the past 100 days to calculate the correlations. In another replication of your study, I also used weekly data und based the correlations on the past 20 weeks.
On both occassions, there wasn't any significant relationship.
If there would have been one, I would have done the following (and suggest you try that for the set of data where you indeed found something): Lag the correlation-variable (differentiated) and do a regression analysis with the differences in returns.(Thus regarding the temporal structure.) Btw: A regression is not the best way in this case. A VECM would be a better choice, but it means a lot of work. Then try it vice versa. Lag the variable containing the returns and regress it on the future period of correlation. This may work. It should be even more significant if you shorten the period, to calculate the correlation. (Like 30 days e.g.)

Your R² statistics are random. You did not post any p-values and the negative (-1%) number for daily-based analysis suggests, that you are not able to reject the null-hypothesis. R² also increases with a shrinking N, so your increasing percentages cannot form the basis of any serious argument.