Posts Tagged ‘asset correlation’

23rd September
2008
written by simplelight

Others have weighed in on whether volatility should be considered an asset class. From the point of view of a long term investor it clearly doesn’t make sense to buy and hold volatility. (In that sense, it is the ultimate cyclical asset class and we should be glad we don’t live in a world of ever increasing volatility!). However, in terms of the diversification benefit for a portfolio, the VIX does exhibit low (and negative) correlation with many of the major asset classes. The table below shows the correlation matrix for major asset classes over the past 750 days, a period during which the VIX had negative correlation with US stocks and real estate and no correlation with European stocks. Notice, though, that a similar diversification benefit could probably have been achieved with a combination of treasuries and bonds.

    TIP AGG GSG VNQ EEM EFA VB VV
Ishares Lehman Ti TIP                
Ishares Leh Agg F AGG 0.95              
Ishares Gsci Cmdt GSG 0.90 0.78            
Vanguard Sf Reit VNQ -0.78 -0.69 -0.69          
Ishares Msci E.M. EEM 0.56 0.68 0.52 -0.37        
Ishares Msci Eafe EFA -0.14 0.05 -0.14 0.25 0.70      
Vanguard Sm Cap E VB -0.54 -0.38 -0.47 0.63 0.25 0.75    
Vanguard Lg Cap E VV -0.32 -0.12 -0.32 0.39 0.56 0.94 0.89  
Cboe Volatility I ^VIX 0.78 0.81 0.60 -0.80 0.55 0.00 -0.39 -0.14

Note: this chart was generated on the AssetCorrelation website which is an excellent resource for monitoring the diversification of your own portfolio.

14th July
2008
written by simplelight

I have to question the need for the wide variety of international country index funds. The AssetCorrelation website has an excellet correlation matrix which covers exchange-traded index funds from various countries around the world.

Take a careful look at the matrix for the various countries. Other than Brazil and Israel (with correlations of 0.73 and 0.35 respectively versus the S&P 500) the rest of the countries’ index funds are all tracking the S&P 500 with >0.90x correlation coefficients.

It might be that the time period is only 90 trading days (about 4 months) and this represents a time in the market which has seen a greater herd mentality than usual. Or it might be that global inflation fears do justify a simultaneous downward revision in global equity asset prices. Either way, lately it has been hard to see the benefits of international equity exposure. Even emerging markets like Turkey, Mexico and Chile have been strongly correlated recently. Inflation really is the great leveller.

25th June
2008
written by simplelight

I was once a respected coder. But for 5 years I’d designed ASIC’s using Verilog (where everything happens at once) and then for 5 years I’d turned to business. And it all changes in a decade. I’d let my skills lapse and in the interim C++ had morphed to Java and then suddenly CPU’s got really fast and scripting was back in vogue. 

I realized that my CS undergrad was quickly becoming worthless. Web programming was a complete mystery to me. (Whether that was really a problem is a philosophical question beyond the scope of a humble blog entry). Here is my road to recovery. In bullet point form amenable to PowerPoint and as buzzword compliant as possible.

Jan 1st, 2008: Resolve to brush up on programming skills.

Which language should I learn? Web development seems cool….what’s involved in that? Narrowed it down to a) the LAMP stack or b) Ruby on Rails. Do I want to be a) paid as a programmer or b) hip ?

I went with Hip. Rails it is.

Here are the steps (and mistakes) I took on the road to recovery:

  1. Linux – I remember that: “ls -al” and all that. It’s the sine qua non for a real programmer.
  2. [email protected](k. That’s a lot of variants of Linux. Go with Ubuntu because I’m semi-African.
  3. Hmm… Windows XP is standard issue at work.
  4. Get an old PC from my IT guy. Spend an entire day installing Ubuntu. Realize I’m now a web programmer so start again and install the server version. What the hell? What’s involved with web programming anyway. Will I be writing the client or the server?
  5. Call college roommate who is on “tiger team” at Yahoo. He says: “Buy Pickaxe“. Sold. In a flash of environmental sympathy I buy the PDF version. It also saves $10. Print it out on corporate printer. Double sided to save the environment.
  6. Need the Rails part: Buy “Agile Web Development with Rails“. We invested in an Agile software company so “agility” must be good.
  7. Start reading. In the interest of time and an anxiety to see the global greeting I dispense with Linux and deploy InstantRails on Windows –> Instant gratification. (Nice to see those programmer types have dropped their antipathy towards Microsoft. I’m a web programmer. Even if it’s only on localhost. (Wow: It’s only February and I could compete with Amazon if I wanted to and if I knew where to buy all the books for my bookstore)
  8. I have a bookstore up and running. No one can see it. That’s ok….how hard can deployment be.
  9. March. Deploytment is hard. People don’t recommend Windows. Could I be the only person writing Ruby code in a Rails environment on Windows XP. Seems to be from my google searches.
  10. Let’s reinstall Ubuntu Linux.
  11. Install ruby gems. Rinse. Repeat. Rinse. Repeat. Check dependencies. Rinse Repeat. Rinse. Repeat.
  12. Install MySQL. (It’s nice that I don’t need to think too much about the database. Seems like something business people should concern themselves with).
  13. Stuff is working. Slow as all hell on this ancient PC but what the hell. People will wait for the page to load.
  14. Becoming a problem that I can only work on my hobby at work. Can’t afford another PC at home.
  15. VMware to the rescue. Downloading an Ubuntu VM on my home PC is a cinch. And hip. Which is important.
  16. Realize I need a real hosting service. (Weeks of agonizing research). Settle on Dreamhost. (I love those guys!)
  17. Deploy app. Hmmm…this is a [email protected](k1ng nightmare!
  18. Passenger (mod_rails) is released a few days later. I realize I’m back on the cutting edge. Deployment is now piss easy.
  19. www.assetcorrelation.com (Live as of June 1st, 2008 — 5 months start to finish)
  20. Start to harass Google to show me some organic search love.

It’s been a wild ride. And not as hard as I thought. In the end, we return to the beginning. I still hate writing test benches. Hacking is still fun. And not having deadlines is the way to go. 🙂

19th June
2008
written by simplelight

There is a promising new website called Asset Correlation which shows the correlation matrix for a host of different asset classes over the past 90 trading days. I have been tracking it for a few months and it is amazing how all the asset classes exhibited far higher correlation during the recent panic. As normalcy has gradually returned to the markets it is interesting to see how the historical scenario of lower correlation between asset classes has returned. A few months ago almost all the cells in the matrix were green and correlations were hovering around 80-90% for most of the major classes. As of today, there is far lower correlation between the classes (indicated by the larger number of yellow and red cells). It will be interesting to keep an eye on this website over the next few months.