correlations breakdown during crisis …devloped markets and developing nations exhibit higher correlations
pimpineasy Wrote: ------------------------------------------------------- > correlations breakdown during crisis > …devloped markets and developing nations > exhibit higher correlations Is that correct? I thought it was shown that the vol increase was a weakness of the measure and not necessarily increased correlations. Contagion situations do cause higher correlations but it is often very hard to prove contagion.
That’s what I’m getting confused about. On one hand, it states that during periods of crises, the correlations increase which is ironic when you use emerging markets as diversifiers. Then they state a rebuttal stating that, in fact that correlations do NOT increase, rather it’s just a case of increased volatilities? Or am I way off base?
ih8studying Wrote: ------------------------------------------------------- > That’s what I’m getting confused about. On one > hand, it states that during periods of crises, the > correlations increase which is ironic when you use > emerging markets as diversifiers. > > Then they state a rebuttal stating that, in fact > that correlations do NOT increase, rather it’s > just a case of increased volatilities? > > Or am I way off base? That’s exactly the way I read it. Correlations increase but it is an error in the way correlations are measured as volatility the denominator increases so covariances/correlations do not actually increase. Literally the next pages contradicts the page before it.
I will go with these answers based on CFAI mock.
What are the answers. False, true. That is what I would put. Just that section was among the most confusing in the book.
True and True in the mock