Method for reducing exposure to correlated markets?

Discussion in 'Trading' started by mgdpublic, Jul 6, 2009.

  1. I've seen books about measuring correlation but I haven't seen anything about how to actually use the correlation coefficient to find a position size for the correlated markets. Anyone know of a book or resource for this info?
     
  2. Google VAR and ye shall find...
     
  3. Murray Ruggiero

    Murray Ruggiero ET Sponsor

    I have done work with market correlation using TradersStudio. We built in a correlation matrix at the portfiolo level so we can minimize exposure of correlated markets. In my research I found something very interesting. The actual correlation of the markets, correlation of equity curve and correlation of drawdown are three different things.

    We really want to look at correlation of drawdown between markets if we are trading a systematic approach.
     
  4. That has been my thinking Murray. You definitely want to look at correlation of returns rather than the markets, but one should only real care if they're correlated and moving against you. I could see markets being correlated with a trend but less correlated against it. I could also imagine the reverse. But is there any research on how to reduce position sizes if your trading, say, two markets with an 85% drawdown correlation?