Volatility Increases in Times of Crisis

Many people have pointed out that stocks all become perfectly correlated in times of crisis. That’s not strictly true but correlations do increase dramatically. Over the past six months (August 4th, 2008 to January 30th, 2009) notice how correlations (for a portfolio containing a selection of the Dow components) have averaged 0.67 and volatility across the portfolio has been 3.1% for the daily return standard deviation.

 

		BAC	GE	IBM	INTC	JNJ	KO	MCD	MMM	MRK	MSFT	PFE	PG	T	WMT	Return	StdDev
Bk Of America Cp	BAC															-95.8%	9.8%
Gen Electric Co	GE	0.63														-80.9%	4.8%
Intl Business Mac	IBM	0.66	0.68													-48.1%	3.0%
Intel Corporation	INTC	0.57	0.64	0.74												-66.9%	4.1%
Johnson And Johns	JNJ	0.50	0.58	0.67	0.69											-28.4%	2.5%
Coca Cola Co The	KO	0.39	0.45	0.56	0.66	0.72										-35.8%	2.8%
Mcdonalds Cp	MCD	0.54	0.62	0.66	0.66	0.69	0.66									-5.5%	2.7%
3 M Company	MMM	0.56	0.66	0.68	0.68	0.77	0.66	0.75								-39.3%	3.0%
Merck Co Inc	MRK	0.55	0.62	0.71	0.75	0.80	0.66	0.73	0.72							-23.6%	3.5%
Microsoft Corpora	MSFT	0.58	0.55	0.75	0.80	0.72	0.68	0.68	0.68	0.73						-54.0%	4.0%
Pfizer Inc	PFE	0.61	0.60	0.66	0.70	0.76	0.64	0.67	0.71	0.80	0.70					-37.5%	3.2%
Procter Gamble	PG	0.53	0.62	0.68	0.69	0.84	0.70	0.73	0.78	0.82	0.72	0.77				-30.1%	2.6%
At&T Inc.	T	0.60	0.57	0.72	0.72	0.77	0.64	0.69	0.69	0.79	0.75	0.75	0.76			-29.7%	3.6%
Wal Mart Stores	WMT	0.44	0.51	0.57	0.57	0.75	0.61	0.72	0.66	0.71	0.61	0.64	0.73	0.66		-34.4%	2.7%
Exxon Mobil Cp	XOM	0.49	0.56	0.71	0.72	0.81	0.64	0.71	0.72	0.78	0.76	0.76	0.78	0.81	0.67	1.9%	4.3%
Portfolio																-44.6%	3.1%

Historically, the same portfolio has exhibited correlations between the various components which have been considerably lower. In fact, over the past twenty years (February 2nd, 1989 to Jan 30th, 2009), correlations have averaged 0.32, approximately half the correlation we have seen recently. The standard deviation of the daily returns was only 1.1%

		BAC	GE	IBM	INTC	JNJ	KO	MCD	MMM	MRK	MSFT	PFE	PG	T	WMT	Return	StdDev
Bk Of America Cp	BAC															3.2%	2.5%
Gen Electric Co	GE	0.49														8.4%	1.8%
Intl Business Mac	IBM	0.31	0.41													7.3%	1.9%
Intel Corporation	INTC	0.31	0.40	0.45												15.4%	2.7%
Johnson And Johns	JNJ	0.27	0.39	0.23	0.22											14.5%	1.5%
Coca Cola Co The	KO	0.28	0.38	0.21	0.22	0.41										12.4%	1.6%
Mcdonalds Cp	MCD	0.27	0.36	0.24	0.22	0.30	0.34									12.9%	1.7%
3 M Company	MMM	0.35	0.45	0.28	0.29	0.31	0.34	0.28								9.1%	1.5%
Merck Co Inc	MRK	0.27	0.36	0.23	0.22	0.51	0.35	0.26	0.28							8.2%	1.9%
Microsoft Corpora	MSFT	0.31	0.41	0.41	0.55	0.28	0.27	0.23	0.26	0.26						21.5%	2.3%
Pfizer Inc	PFE	0.30	0.40	0.25	0.23	0.52	0.35	0.27	0.29	0.54	0.29					12.0%	1.8%
Procter Gamble	PG	0.27	0.37	0.19	0.20	0.41	0.43	0.33	0.34	0.35	0.21	0.36				14.3%	1.6%
At&T Inc.	T	0.32	0.37	0.26	0.25	0.32	0.32	0.27	0.29	0.29	0.28	0.29	0.30			8.4%	1.8%
Wal Mart Stores	WMT	0.32	0.45	0.29	0.30	0.34	0.36	0.32	0.35	0.31	0.33	0.33	0.34	0.32		13.8%	1.8%
Exxon Mobil Cp	XOM	0.29	0.37	0.26	0.24	0.33	0.34	0.25	0.37	0.31	0.28	0.32	0.27	0.35	0.29	13.5%	1.5%
Portfolio																13.2%	1.1%

 All these results were created using the tools at AssetCorrelation.com