Systemic Liquidity Risk and Bipolar Markets: Wealth Management in Today's Macro Risk On/Risk Off Financial Environment

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Cross-Sectional Asset Correlations

There is an abundance of research, compiled by investment bank research departments among others, which support the generalized statement that asset returns have become more highly correlated since the 2007/8 global financial crisis than at any other time in recent financial history. [1] As will be shown by reference to several studies the degree to which constituents of global equity indices moved in tandem with each other – one example of cross-sectional correlation – reached extraordinary levels in the summer of 2010 and also again, even more so, starting in August of 2011 and in evidence throughout much of the remainder of that year.

The nature of the increased co-movement of returns is seen not just in relation to equities but across multiple asset classes. For example the degree to which certain foreign currency pairs have become highly correlated with different global indices, commodities, and other asset sectors will be demonstrated in Chapter 5. Insights into heightened correlations can be ascertained by using various statistical and other quantitative techniques, across the full spectrum of asset markets, to observe a surprisingly large degree of inter-dependence and intriguing patterns of co-movement. Contrary to the approach taken by many research analysts who tend to confine their focus to individual securities or specific asset markets, part of the silo mindset which Gillian Tett has described in her book Fool’s Gold: The Inside ...