Correlation Surprise
By William Kinlaw, David Turkington, State Street Associates
Jan 1, 2014

By William Kinlaw and David Turkington

Published in the Journal of Asset Management, January 2014

We extend Kritzman and Li’s study by disentangling the volatility and correlation components of turbulence to derive a measure of correlation surprise. On average, after controlling for volatility, we find that periods characterized by correlation surprise lead to higher risk and lower returns to risk premia than periods characterized by typical correlations.

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