Equity correlation and volatility move out of sync
Correlation in the equity markets has traditionally moved in tandem with volatility, but since June the relationship between the two has broken down. What has caused the rupture and how have investors been affected? Peter Madigan reports
Financial crises usually have a striking impact on correlation. With investors panicking and pulling money out of any investment deemed to be at risk, volatility and correlation can spike to extremes as everything moves in tandem. The same pattern emerged in the second quarter, when the eurozone sovereign debt crisis was at its peak. Unusually, though, volatility has dropped in the months since May, while correlation remains locked at close to record highs. This phenomenon has been evident
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