Measurement of Current Market Correlations Based on Ensemble Statistics

Abstract

We employ averaging over statistical ensemble of assets to derive an index characterizing the level of correlations in a financial market – the eCORR index. This index does not require lengthy historical data and reacts immediately to any changes in correlations. Study of statistical properties of eCORR for US equity markets reveals how volatility is distributed between the common part and the part specific to individual equities. It also allows to demonstrate and quantify the correlation-drawdown hysteresis effect. The eCORR index promises to be useful for early detection of market correlations, managing risk concentrations and maintaining portfolio diversification.