Correlation Matrix – Visualising Diversification Potential across Instrument Lists

Correlation is a statistical measure that informs us how markets move in relation to each other. In portfolio management, this concept helps to improve expected returns against a certain level of risk by making use of diversfication. For that reason, we want to know whether – for example – the constituents an equity index or a list of sectors move in lockstep with each other or not. So how about a multi asset correlation matrix?

Correlation Overview for ETFs

The following figure shows the 30-day correlation for ETFs across all major asset classes denominated in USD. Using a visual approach like this, we can easily identify diversification opportunities: For example, UNG (Natural Gas ETF) shows a negative correlation against the majority of all other asset classes like stocks or bonds. Another example would be stocks from the financial sector (XLF), which provide a negative correlation to many bond ETFs. By the way: You can also apply the correlation matrix to other time frames, for example if you want to display the intraday correlation of FX pairs.

The code we will provide below enables you to type in the name of any list in the input section. It could be one from the data provider, for example the Eikon ticker 0#.DJI to run the correlation matrix on the Dow Jones index members:

Alternatively, you can enter the path to one of the symbol lists that you have created:

 

Equilla Code for the Multi Asset Correlation Matrix

To program the indicator above in Tradesignal, we take a previous article (see here) and use the existing code. There are only a few extra lines of code we need to implement to access the list of symbols instead of just one instrument (thank you, Philipp!).

Here`s the final code:

Equilla code for correlation matrix list
Equilla code for correlation matrix list
Equilla Code for Correlation Matrix

Please contact us if you would like to receive the code and subscribe to our blog ­čÖé

***
Tradesignal® is a registered trademark of Tradesignal GmbH. Unauthorized use or misuse is strictly prohibited. Data by Refinitiv EIKON.
Copyright www.welovealgos.com. Terms of use: welovealgos.com/terms-conditions

 

 

 

2 thoughts on “Correlation Matrix – Visualising Diversification Potential across Instrument Lists

  1. Very slick!

    It did leave me wondering how stationary the correlations were over time? Also, whether or not there’s serial correlation over time, ie do rising correlations indicate more positive future correlations, and vice versa?

    Very good work. THANKS!

    1. Hi Gary, thanks for your feedback, really appreciate that! An article on autocorrelation is a good suggestion ­čÖé

Leave a Reply

Your email address will not be published. Required fields are marked *

Subscribe to this Blog