Jan

2

Stocks have more correlated recently than any time over the past 30 years:

1. Correlation between assets and asset classes increases during panic/selloff mode, but in 2011 the stock market finished flat

2. One would expect increasing deployment of ETF's and other index derivatives to increase individual stock correlation per unit volatility over time, but are there other explanations? ZIRP, globalization of markets, HFT, abandonment of stock-picking in favor of beta exposure, other?

3. Is stock correlation mean-reverting (as suggested by the chart), or is there a secular move toward high correlation?

3a. Does high correlation create stock-picking opportunities (babies with bathwater)? Will the type of stocks which traditionally did well after high-correlation periods do well if/when the current high correlation moderates?

4. Does the cause and effect of asset-class correlation differ from stock correlation? Does asset-class decoupling have predictive value (eg commodities, stocks, treasuries in 2011)?


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