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14 September 2011

S&P Sector Correlations

Earlier this year, the CME added a whole range of S&P E-mini sector index futures to their universe of available instruments. These contracts were created to provide a mechanism to directly hedge sector exposure according to the S&P Select Sector group of indices.

PortfolioScience has followed suit and introduced symbols for all CME S&P sector index futures contracts. With regards to current market conditions, the correlations of each of these sectors to the broader S&P 500 index are directly relevant. Currently, YTD correlation for each of the cash indices stands at:

SymbolNameYTD Correlation
IXYConsumer Discretionary0.959
IXRConsumer Staples0.891
IXEEnergy0.886
IXMFinancial0.934
IXVHealth Care0.939
IXIIndustrial0.963
IXBMaterials0.929
IXTTechnology0.959
IXUUtilities0.843

Save for Energy and Utilities, most of these sectors are showing fairly high correlations to the market. This is likely a result of equities as an asset class suffering from systemic volatility due to the effects of the financial crisis rearing its head recently. Another useful analysis is the sector cross-correlations, which are presented below in the form of a correlation matrix. All calculations are using YTD data:

Using Excel's "conditional formatting" feature, the correlation matrix we initially generated using the RiskAPI Add-In was modified to highlight higher correlations in red and lower correlations in yellow. Note that Utilities (IXU) currently has the lowest cross-correlation of the group.

09 September 2011

Currency Risk: Major Event in the Swiss Franc

This week saw probably the largest one day move in a major currency in the last 20 years.

YTD realized volatility for USDCHF was at 12.99% as of Monday, September 5th. On Tuesday, September 6th, due to the SNB's announcement that it would purchase "unlimited quantities" of non CHF currencies to keep it at 1.20 (number of Swiss Franc per 1 Euro) or lower, the Franc experienced a devaluation of almost 9%. Quoted in Francs (USDCHF), the currency rate moved from 0.7865 to 0.8568.

To appreciate the magnitude of this one-day event, using YTD data, a single standard deviation represented a move of 0.81% in the USDCHF exchange rate. Tuesday's event resulted in a shift of 8.9%, equivalent to roughly TEN TIMES this amount.

Critics of G-7 central banking policies will, no doubt, jump on such data as proof that the stated mission of "price stability" is proving to be out of reach lately.

Current YTD realized volatility for USDCHF as of September 8th stands at 16.51%

The results above were calculated using The RiskAPI Add-In, our unique software client which allows fund managers to access a whole spectrum of on-demand portfolio risk analysis calculations.

30 August 2011

Precious Metals Volatility

Here are the current realized volatility values for the major precious metals:

Name90-Day Realized Volatility
Gold21.16%
Silver39.94%
Platinum17.41%
Palladium28.16%

Of note is the relatively low volatility of Platinum, which is most likely due to its lack of participation in the flight-to-quality/safe heaven trade resulting out of the US & EU debt crises.

The table above was calculated using The RiskAPI Add-In, our unique software client which allows fund managers to access a whole spectrum of on-demand portfolio risk analysis calculations.

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