Cross Assets Correlations

What does it mean Cross Assets Correlations and how we use it in our day by day decision making process, this is the argument that we will cover on December 11th  at 2:00PM GMT during a live webinar hosted by Forexpros.

http://www.forexpros.com/live-events/webinars/cross-asset-correlations-11406

If you have been reading some of our posts or some of the Daily Game Plan we have been publishing we rely on cross assets correlation for our decision making process.

Correlation between a large number of asset classes has remained locked at high levels for much of this year, as a continued drip of bad news has unsettled financial markets. Spooked investors have pulled money out of certain assets en masse and piled back into them as sentiment improves – contributing to a so-called risk-on/risk-off phenomenon. This kind of occurrence is not unusual in crisis time, when correlations tend to move to extremes. What is different this time around is that volatility levels have fallen since July. Despite this, correlation remains at high levels.

The persistently high levels of correlation may reflect concern that further crises will materialise, this can be one reading key. Even though implied volatility has fallen in the equity market, skew , which represents the difference in implied volatility between out-of-the-money put options and out-of-the-money calls, is telling us that investors wants to be hedged, reflecting a demand for protection against tail risk events.

Although there is the sense that things have normalised, implied and realised correlations remain high, therefore you have an underlying sense of unease about the possibility of another crisis in the future.

The risk-on/risk-off concept has contributed to the increase in correlation, because investors view certain trades as risk-on. The market moves into and out of those trades, creating an underlying ebb and flow of risk that's going into what are perceived as risky assets. With correlations between some asset classes at extreme levels, there are opportunities for traders to bet on these relationships breaking down, or taking correlated assets as signal confirmation, although we know that playing on these correlations is by no means a guaranteed cash cow.

We think that by understanding the cross asset correlations you will be able to put the probabilities by your side, because trading is not gambling.

Originally posted at www.77sigmatrading.com