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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

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February 1, 2009 Posted by | Economics, Investing | Leave a comment