Conditional Correlations and Principal Regression Analysis for Futures

Armine Karami (), Raphael Benichou, Michael Benzaquen () and Jean-Philippe Bouchaud ()
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Armine Karami: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Raphael Benichou: LPTENS - Laboratoire de Physique Théorique de l'ENS [École Normale Supérieure] - FRDPENS - Fédération de recherche du Département de physique de l'Ecole Normale Supérieure - ENS Paris - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique - UPMC - Université Pierre et Marie Curie - Paris 6 - CNRS - Centre National de la Recherche Scientifique
Michael Benzaquen: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Jean-Philippe Bouchaud: CFM - Capital Fund Management

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Abstract: We explore the effect of past market movements on the instantaneous correlations between assets within the futures market. Quantifying this effect is of interest to estimate and manage the risk associated to portfolios of futures in a non-stationary context. We apply and extend a previously reported method called the Principal Regression Analysis (PRA) to a universe of 84 futures contracts between 2009 and 2019. We show that the past up (resp. down) 10 day trends of a novel predictor-the eigen-factor-tend to reduce (resp. increase) instantaneous correlations. We then carry out a multifactor PRA on sectorial predictors corresponding to the four futures sectors (indexes, commodities, bonds and currencies), and show that the effect of past market movements on the future variations of the instantaneous correlations can be decomposed into two significant components. The first component is due to the market movements within the index sector, while the second component is due to the market movements within the bonds sector.

Date: 2021
Note: View the original document on HAL open archive server: https://hal.science/hal-02567501v1
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Citations: View citations in EconPapers (3)

Published in Wilmott Magazine, 2021, 111, pp.63-73. ⟨10.1002/wilm.10906⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02567501

DOI: 10.1002/wilm.10906

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