Stockholm School of Economics

Finance department (Bachelors thesis)

Spring 2013

Time-ar!ing "orrelation and the Benefits of
"ross-#sset "lass $i%ersification

22242 Tobias Lideus

22343 Rikard Engberg

$

#&stract
In this thesis, return data on the US stock and corporate bond markets together ith go!d and "TI#
$rude %i! prices o&er the period '()* + 2,'2 ere used to e-amine the time#&ar.ing corre!ations
and bene/its /rom cross#asset c!ass di&ersi/ication0 It conc!udes that corre!ations &ar. distinct!. o&er
time and an a!!#e1uit. in&estor bene/it /rom ha&ing positions in the bond market, as in&estment
grade bonds ha&e shon a genera!!. !o or negati&e corre!ation ith the stock market during crises0
2or an in&estor, it cou!d there/ore be cost!. to ignore the bene/its that the bond markets pro&ide0
3o!d is shon to be a good source /or di&ersi/ication during se&ere /inancia! crises, e&en i/ the
&o!ati!it. in returns are higher than /or in&estment grade bonds0

222424student0hhs0se
$
223434student0hhs0se

T'tor( 5ssistant 6ro/essor 7ichae! 8a!!ing
)e!*ords( $orre!ation, 9i&ersi/ication, In&estment 7anagement, $orporate bonds, Sharpe ratios
#ckno*ledgements( "e ou!d !ike to thank our tutor 5ssistant 6ro/essor 7ichae! 8a!!ing /or his
&a!uab!e input0 "e ou!d a!so !ike to thank $itigroup and :rummer ; 6artners /or pro&iding us
ith the data needed to conduct our stud.0 2ina!!., e are grate/u! /or the he!p/u! remarks gi&en b.
<achar. =rumme at the /ina! stages o/ riting0 5!! errors ere our on0


"ontents
'0 Introduction0000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 '
'0' %b>ecti&e ........................................................................................................................................ 2
20 Theoretica! /rameork 0000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 3
20' Risk#return re!ationship ................................................................................................................... 3
202 The 7arkoit? 6ort/o!io Se!ection 7ode! ........................................................................................ 4
30 6re&ious !iterature 000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 @
30' Internationa! stock markets corre!ation ............................................................................................. 6
302 Stock marketsA corre!ation ith bond markets ................................................................................... 8
303 Stock marketsA corre!ation ith other asset c!asses ............................................................................. 8
304 5cti&e &s0 passi&e port/o!io management and per/ormance e&a!uation ................................................ 9
30B 7omentum in asset returns ............................................................................................................ 10
40 9ata 000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 '2
40' Stock market ................................................................................................................................. 12
402 :ond markets ................................................................................................................................ 12
403 $ommodities markets .................................................................................................................... 13
404 %ther data .................................................................................................................................... 13
40B $rises de/initions ........................................................................................................................... 14
B0 8.potheses 000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 'B
@0 7ethodo!og. 000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 '@
@0' Cee.#"est standard errors .......................................................................................................... 16
@02 Testing /or constant corre!ation o&er time, '()@ + 2,'2 .................................................................. 16
@03 Testing i/ the corre!ations are una//ected during crises periods ......................................................... 17
@04 Testing i/ the corre!ations are una//ected b. market /actors .............................................................. 18
@0B $ase stud.D 5ssessing the bene/its o/ di&ersi/ication ........................................................................ 18
@0@ Robustness test ............................................................................................................................. 20
@0* 6rob!emati?ation ........................................................................................................................... 21
*0 Resu!ts 00000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 22
*0' $onstant corre!ation test resu!ts ..................................................................................................... 22
*02 The e//ect o/ crises periods on corre!ation ...................................................................................... 23
*03 The e//ect o/ market parameters on corre!ation ............................................................................... 24
*04 $ase stud. resu!ts .......................................................................................................................... 25


*040' Summar. statistics................................................................................................................... 25
*0402 The port/o!iosA per/ormance during crises in genera! ................................................................. 26
*0403 9i&ersi/ication bene/its during the 9otcom crisis ..................................................................... 26
*0404 9i&ersi/ication bene/its during the Subprime crisis .................................................................... 27
*0B Robustness test resu!ts ................................................................................................................... 28
)0 5na!.sis 000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 2(
(0 $onc!usion 0000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 32
(0' Suggestions /or /urther research ..................................................................................................... 32
',0 2igures and Tab!es 0000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 33
Re/erences 000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 B*
5ppendi- 00000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 B(

1

1+ ,ntrod'ction
The idea o/ di&ersi/ication is an o!d one and the phrase EdonAt put a!! .our eggs in one basketF
e-isted !ong be/ore modern /inance theor.0 The princip!es o/ di&ersi/ication in the /inancia! markets
as /irst pub!ished b. 7arkoit? G'(B2H and earned him the Cobe! 6ri?e in Economics in '((,0
5ccording to Modern Portfolio Theory G76TH, an in&estor is on!. concerned about risk#return
re!ationships, and that b. di&ersi/.ing into assets ith a !ess than per/ect corre!ation, the o&era!! risk
o/ the port/o!io i!! be !oer0 8oe&er this theor. rest on the assumption that corre!ation is in /act
constant, !eading to possib!e disasters /rom an in&estment management perspecti&e i/ changes in
corre!ation are not taken into consideration G:odie et a! 2,,)H0
Se&era! studies ha&e been conducted to e-amine the changes in corre!ation beteen
internationa! stock markets o&er time and during e-treme conditions, see Longin and So!nik G2,,'H
and $ampbe!! et a! G2,,2H0 $oaker G2,,@H ana!.ses ho the return corre!ations beteen di//erent
asset c!asses &aries o&er time, but !itt!e has been ritten about ho the corre!ation &aries during and
beteen speci/ic crises, in order to understand ho the actua! di&ersi/ication bene/its changes and
hat the under!.ing reasons behind these changes are0
This stud. takes the &iepoint o/ an e1uit. in&estor and ana!.ses the historica! bene/its o/
di&ersi/ication b. in&estigating ho corre!ations ha&e changed o&er times o/ crises, more speci/ica!!.
the 9otcom#crisis in the ear!. 2,,,As, the Subprime#crisis in 2,,*#,) and the So&ereign debt crisis in
2,''#'20 The asset c!asses studied against the stock market are corporate bonds Gboth in&estment
grade and high .ie!d bondsH together ith to o/ the most common!. traded commoditiesD "TI#
$rude %i! and go!d0
To reach the conc!usions, a top#don approach i!! be taken b. /irst con/irming pre&ious
research that corre!ation is in /act time#&ar.ing, /o!!oed b. an ana!.sis on ho the di//erent assetsA
corre!ations ith the stock market ha&e changed be/ore, during and a/ter the speci/ic crises0 This i!!
be /o!!oed b. a case stud. that aims to 1uanti/. the bene/its o/ di&ersi/ication o&er the past 2B
.ears, !inking the corre!ation changes to in&estment management0 5s i!! be presented in Section 2,
a rationa! in&estor is on!. concerned about returns in re!ation to its risk, and the risk o/ a port/o!io is
the sum o/ its co&ariances0 This is in turn direct!. determined b. the assets corre!ationD 5n increase
in corre!ation imp!ies an increased risk0 To capture this, the case stud. compares the Sharpe ratio o/
a ide set o/ di//erent port/o!ios o&er time, as it is a /unction o/ both the port/o!ioAs risk and return,
and thus pro&ides an indication o/ the actua! bene/its o/ di&ersi/ication /or in&estors0
2

1+1 -&.ecti%e
This thesis studies ho the corre!ation in returns beteen the stock market and other asset c!asses
&aries o&er time in genera! and during crises in particu!ar0 It i!! discuss ho di&ersi/ication bene/its
/rom e-panding the in&estment hori?on into other asset c!asses changes ith market trends0
The thesis ob>ecti&e is summari?ed as /o!!osD
Study how return correlations between the stock market and other asset classes changes during crises, and
what the implications of that are on the benefits of cross-asset class diversification.

3

S
r
]

o
p

o
P
2+ Theoretical frame*ork
:odie et a! G2,,)H out!ines the /undamenta! steps in a port/o!io managerAs in&estment processD GiH
Capital allocation beteen a risk. port/o!io and a risk#/ree asset, GiiH sset allocation beteen di//erent
asset c!asses and GiiiH Security selection ithin each asset c!ass0 This process is deri&ed /rom I7odern
6ort/o!io Theor.A G76TH that as de&e!oped in the '(B,s originating ith 7arkoit? G'(B2H, gi&ing
rise /or the E7arkoit? 6ort/o!io Se!ection 7ode!F hich i!! be presented in greater detai! in this
section, a/ter the readers is pro&ided ith an intuiti&e understanding about the bene/its o/
di&ersi/ication0 5n important point is the /act that the 76T assumes constant corre!ation beteen
di//erent assets G:odie et a!, 2,,)H0
2+1 /isk-ret'rn relationship
9epending on an in&estors risk a&ersion, he i!! a!!ocate a!! o/ his /unds beteen a risk. port/o!io,
and a risk#/ree asset Ggenera!!. e-pressed as T#bi!!sH creating a comp!ete, risk. port/o!io0 5!! possib!e
combinations beteen the risk#/ree asset and the risk. port/o!io are graphed be!o and ca!!ed the
in&estment opportunit. set0 This straight !ine is knon as the capita! a!!ocation !ine G$5LH and
e1ua!s the increase in e-pected return o/ the comp!ete port/o!io per unit o/ additiona! risk0 The s!ope
is the reard#to#&ariabi!it. ratio, a!so knon as Sharpe ratio0 SD
S =
(L(
p
)-
]
)
c
p
E10 G20'0'H
%ther things being e1ua!, in&estors pre/er as steep#s!oping a $5L as possib!e, because this means
higher e-pected returns /or each !e&e! o/ risk0 Th's the o&.ecti%e is to ma1imi2e S0









E(r
p
)
E(r)
$5L
2igure G20'02H
4

5s in&estors care about returns in re!ation to risk, the risk#return combinations /rom the set o/ assets
shou!d be identi/ied0 The e-pected return o/ a port/o!io e1ua!s the eighted a&erage o/ the e-pected
return o/ the indi&idua! assets in the risk. port/o!ioD
E(r
p
) = w

E(r

)
n
=1
E10 G2020'H
The risk o/ the port/o!io hoe&er is main!. determined b. ho the assetsA returns mo&e re!ati&e to
each other0 Thus, the port/o!io &ariance is not the eighted a&erage o/ the &o!ati!it. on the indi&idua!
assets, rather it is the eighted sum o/ co&ariances, and each eight is the product o/ the port/o!io
proportions o/ the pair o/ assets in the co&ariance termD
o
p
=
_
w
]
w

Co:(r
]
r

)
n
=1
n
]=1
E10 G20202H
5s shon in the /ormu!a be!o, the co&ariance is computed through the corre!ation coe//icient GpH,
and the standard de&iations Gi0e0 &o!ati!itiesH /or each pair o/ assets0 This .ie!ds an e-pression /or
port/o!io &ariance depending on corre!ation, and the &o!ati!it. o/ the assets0
Co:(r
]
r

) = p
],
o
]
o

cIds
----- o
p
= _
w
]
w

p
],
o
]
o

n
=1
n
]=1
E10 G20203H
The corre!ation coe//icient can take continuous &a!ues beteen #' and J'0 I/ the corre!ation is J',
the corre!ation is said to per/ect!. positi&e, and the returns /rom the assets i!! e-act!. /o!!o each
other0 The opposite is true hen the corre!ation is #', and a corre!ation o/ ?ero indicates that the
asset mo&ements are comp!ete!. random in re!ation to each other0 The e3'ations a&o%e re%eals
that the lo*er the correlation0 the lo*er the portfolio %ariance0 and the possi&ilit! of a higher
Sharpe ratio+ It /urther re&ea!s that the standard de&iation o/ the port/o!io i!! a!a.s be !ess than
the eighted a&erage o/ the asset &o!ati!ities, un!ess the assets are per/ect!. positi&e!. corre!ated0 This
imp!ies that the !oer the corre!ation beteen assets, the greater is the di&ersi/ication bene/its
GSiege!, 2,,)H0
2+2 The 4arko*it2 5ortfolio Selection 4odel
5/ter identi/.ing the risk#return opportunities /or the set o/ assets, these can be summari?ed b. the
minimum-variance frontier, i!!ustrated be!o in 2igure 2030'0 The minimum-variance frontier shos the
!oest attainab!e &ariance, gi&en an e-pected port/o!io return0 5!! the port/o!ios that !ie on the
minimum#&ariance /rontier, abo&e the global minimum-variance portfolio, pro&ide the best risk#return
opportunities and are said to !ie on the efficient frontier.
5

E(r
p
)
r
]

o
0ptimal iisky poitfolio
ulobal minimum-vaiiance poitfolio
CNL
Efficient fiontiei
of iisky assets
Inuiffeience cuive
0ptimal
complete
poitfolio Inuiviuual assets
The second part o/ the se!ection process in&o!&es the risk#/ree asset, and as abo&e it is
desired to /ind the $5L ith the highest Sharpe ratio Gi0e0 steepest s!opeH0 The steepest possib!e $5L
supported b. the set o/ assets is tangent to the e//icient /rontier, and is knon as the capital market line
G$7LH0 This tangenc. point is the best combination o/ risk. assets, and knon as the optimal risky
portfolio0
The /ina! step is to a!!ocate the /unds beteen the risk#/ree asset and the optima! risk.
port/o!io, depending on the in&estorAs indifference curve, hich is gi&en b. his risk a&ersion0 8ence, the
optima! a!!ocation is gi&en b. the optimal complete portfolio on the $7L0


E(r)
2igure G2030'H
6

3+ 5re%io's literat're
The &ast ma>orit. o/ the !iterature on ho corre!ations &ar. o&er time is /ocused on the internationa!
stock markets, and ho corre!ations &ar. conditiona! on e-treme returns0 In this section these
/indings are presented, a!ong ith an e-tensi&e cross#asset c!ass corre!ation stud. done b. $oaker
G2,,@H0 To support the case stud., an o&er&ie o/ some !iterature on passi&e &s0 acti&e port/o!io
management, per/ormance e&a!uation and momentum strateg. is a!so be presented, and together the
resu!ts /rom these papers are used to put this thesis into perspecti&e0
3+1 ,nternational stock markets correlation
Longin and So!nik G'((BH in&estigated the corre!ation beteen internationa! stock markets during the
.ears '(@, + '((,, using month!. e-cess return data and /ound that corre!ations had genera!!.
increased o&er time and a!so that the. tended to increase in times o/ high &o!ati!it.0 This acted as the
basis /or their ne-t paperD Longin and So!nik G2,,'H, here the. app!. a bi&ariate /rameork to
stud. the US stock market separate!. against /our internationa! stock markets during the period '(B(
+ '((@0 The. /ind that corre!ations are dependent on market trends and not market &o!ati!it. per se,
and conc!ude that correlation increases during bear markets, but not during bull markets. To reach this
conc!usion the e-treme &a!ue theor. GEKTH
'
is used to stud. the dependence structure o/ the
di//erent e1uit. indices and estimate the conditiona! corre!ation on increasing, pre#determined
thresho!d !e&e!s o&er a mu!ti&ariate return distribution0 These thresho!d !e&e!s are determined as LM
percentage points aa. /rom the empirica! mean /or each countr.0 Using their approach, as the
thresho!d !e&e!s increases, the corre!ation o/ !arge returns shou!d as.mptotica!!. go to ?ero0 The.
sho that corre!ation o/ !arge negati&e returns does not con&erge to ?ero, but tend to increase ith
the thresho!d !e&e!, hi!e /or positi&e returns the corre!ation decreases and con&erges to ?ero as the
thresho!d !e&e!s increases0 Thus, the assumption o/ mu!ti&ariate norma!it. can be re>ected hen
returns are negati&e, but not hen returns are positi&e0 This pro&ides e&idence that corre!ation
increases during /inancia! stress0
$ampbe!!, =oed>ick and =o/man G2,,2H reached a di//erent conc!usion and state that e&en i/
corre!ation is time#&ar.ing, it does not imp!. that corre!ations depend on the si?e o/ market
mo&ements, and that corre!ation studies conditiona! on si?e, such as Longin and So!nik G2,,'H
presented abo&e, a!ong ith Ramchand and Susme! G'(()H, :o.er, et a!0 G'((*H and Lorethan and
Eng!ish G2,,,H i!! a!! su//er /rom a theoretica! estimation bias0 This bias i!! arise /rom the choice

1
2or more in/ormation on EKT, see Tan G'())H
7

o/ e-treme returns, Gi0e0 the nature o/ the conditioning on the si?e o/ the >oint returnH but a!so on the
assumed under!.ing >oint return distribution0 :o.er et a!0 and Lorethan and Eng!ish condition their
corre!ation estimates on one component o/ the bi&ariate return distribution, and then estimate the
truncated conditiona! corre!ation /or bi&ariate return obser&ations in the cases here one o/ the
returns e-ceed a certain thresho!d !e&e!0 $ampbe!! et a! G2,,2H criticise this approach, arguing that
truncating a >oint return distribution ith constant corre!ation !eads to a donard bias /or
increasing thresho!d !e&e!s, ith the imp!ication o/ an increase in ho o/ten the assumption o/
constant corre!ation can be re>ected0 Longin and So!nikAs G'((B and 2,,'H methodo!og. is s!ight!.
di//erent as the. on!. consider the cases here both return series e-ceed pre-determined thresho!d
!e&e!s, creating a E1uadrantF o/ re!e&ant return obser&ations0 "hen mo&ing /urther into the bi&ariate
tai!, the conditiona! corre!ations i!! as pre&ious!. discussed con&erge to ?ero0 8oe&er, $ampbe!! et
a! G2,,2H c!aim that this approach gi&es rise to a theoretica! bias simi!ar to that o/ :o.er et a!0 and
Lorethan and Eng!ish0
Instead o/ ad>usting the conditioned corre!ation estimates /or this theoretica! bias G/rom
either a truncated or 1uadrant conditioning approachH $ampbe!! et a! G2,,2H take a port/o!io
managers &iepoint and condition their corre!ation measure in a a. consistent ith the port/o!io
Ka!ue#at#risk GKaRH0 5s described b. Linsmeier and 6earson G2,,,H, KaR is a statistica! measure o/
possib!e port/o!io !osses resu!ting /rom Inorma!A market mo&ements, such that the corre!ation
estimates are conditioned on port/o!io returns /a!!ing be!o a pre#speci/ied orst#case port/o!io
1uanti!e, instead o/ being conditioned on the returns on either one or both assets /a!!ing be!o a
particu!ar thresho!d !e&e!0 Through the KaR methodo!og., estimations can be made on the
probabi!it. o/ a port/o!ioAs return /a!!ing be!o a thresho!d KaR#return ith a speci/ied con/idence
!e&e!0 I/ constant corre!ation is assumed o&er the >oint return distribution, the probabi!it. o/ the
port/o!io return /a!!ing be!o the KaR#!e&e! e1ua!s the eighted a&erage o/ the indi&idua! assetAs
probabi!it. o/ /a!!ing be!o the same KaR#!e&e!0 5s con/idence !e&e! increases, return mo&es /urther
into the tai!s Go/ the >oint port/o!io distributionH, and the KaR increases0 I/ at the same time, the
corre!ation beteen the assetsA return ere to increase + the port/o!ios KaR i!! e-ceed the eighted
a&erage KaR o/ the indi&idua! assets, and the corre!ation changes can be pro&ed0 Using the same
e1uit. markets as Longin and So!nik G2,,'H, ith more /re1uent samp!ing but during a shorter time
period, 7a. '((, + 9ecember '(((, Linsmeier and 6earson G2,,,H obser&e an increase in the
conditiona! 1uanti!e corre!ation during both bull markets and bear markets0 This goes against the /indings
8

o/ Longin and So!nik G2,,'H ho cou!d on!. obser&e an increased corre!ation in bear markets0 This
indicates that di&ersi/ication bene/its erode hen the. are needed the most0
3+2 Stock markets correlation *ith &ond markets
$oaker G2,,@H studies the &o!ati!it. o/ corre!ation and its imp!ications /or asset a!!ocation decisions
b. ana!.sing the simp!e ro!!ing corre!ation o/ 'B di//erent asset c!asses against the S;6 B,, in one#,
three#, /i&e#, and ten#.ear time series o&er a 3B#.ear period G'(*,#2,,4H, using month!. return data0
8e a!so ana!.ses the di&ersi/ication bene/its in .ears hen the S;6 B,, dec!ines0 8e /inds that the
corre!ation o/ in&estment grade corporate bonds ith the S;6 B,, &aries distinct!. o&er time, but
that the. ha&e pro&ided high di&ersi/ication bene/its0 In a!! o/ the eight .ears ithin the samp!e
here the S;6 B,, dec!ined, the bonds earned positi&e returns, ith a 3B#.ear corre!ation o/ ,023
and a high o/ ,0B* /or an. B#.ear period0 9uring the !i/etime o/ the high .ie!d inde- used, the
corre!ation beteen high .ie!d bonds and the S;6 B,, is ,0B,, and out o/ the /our times the S;6
B,, has dec!ined the high .ie!d bonds ha&e dec!ined three times0 The corre!ation beteen the S;6
B,, and high .ie!d bonds is genera!!. stronger and !ess &o!ati!e o&er time than the corre!ation
beteen the S;6 B,, and in&estment grade bonds, indicating that there are greater di&ersi/ication
bene/its /rom in&estment grade than high .ie!d bonds0 This conc!usion is consistent ith the
/indings o/ Rei!!. and "right G2,,'H ho conc!ude that there are e&en stronger corre!ations beteen
high .ie!d bonds and the S;6 B,, than beteen high .ie!d and in&estment grade bond markets0
2o!!oing Rei!!. and "right G2,,'H and $oaker G2,,@H it is shon that in&estment grade
bonds is a better source /or di&ersi/ication that high .ie!d bonds0 This might be e-p!ained b. the
phenomenon E2!ight#to#1ua!it.F as studied b. :aur and Luce. G2,',H, hich is the /!o /rom stocks
into in&estment grade bonds hen there is turmoi! in the /inancia! markets0 8oe&er the researchers
on!. studied short periods o/ up to 2, trading da.s /o!!oing a stock market donturn Gan e-amp!e
being the September ''
th
terrorist attacksH0 Together the research imp!ies a potentia! bene/it /rom
di&ersi/ication /rom the bond markets0
3+3 Stock markets correlation *ith other asset classes
In the paper b. $oaker G2,,@H the corre!ation beteen the S;6 B,, and natura! resources
2
as ,04(
or !ess /or a!! B#.ear periods, and negati&e in '* out o/ the past 3B .ears, ith a 3B#.ear corre!ation o/
,0,'0 Catura! resources earned positi&e returns in si- out o/ eight .ears hen the S;6 dec!ined0

2
3o!dman Sachs $ommodit. Inde-, Geighted on the basis o/ !i1uidit. and or!d market productionH,
httpDNN0go!dmansachs0comNhat#e#doNsecuritiesNproducts#and#business#groupsNproductsNgsciN co!!ected 2,'3#
,3#'B
9

:O.OkPahin et a! G2,,)H use simp!e ro!!ing corre!ations a!ong ith a d.namic conditiona!
corre!ation G9$$H methodo!og. as de&e!oped b. Enge! G2,,2H to e-amine the corre!ation beteen
the same commodit. inde- as abo&e in three di//erent sub#periods depending on trading &o!umes
and economic conditions0 The sub#periods areD 7a. '((2 + Qune '((*, Qune '((* + 7a. 2,,3 and
Qune 2,,3 + Co&ember 2,,)0 Co corre!ation trends cou!d be /ound b. either the simp!e ro!!ing
corre!ation method or b. the 9$$ method0 2urthermore the. use a methodo!og. simi!ar to that o/
Longin and So!nik G2,,'H to ana!.se stock and commodit. !inkages hen returns on the respecti&e
indices both take &a!ues in a gi&en tai! o/ their respecti&e distributions0 2rom '((' to 7a. 2,,),
corre!ations are negati&e in the >oint !oer tai!, high!ighting the di&ersi/ication bene/its o/
commodities0 8oe&er, hen inc!uding the returns /rom the summer and /a!! o/ 2,,), corre!ations
are positi&e in both the upper and !oer tai!0 This indicates that the di&ersi/ication bene/its o/
commodities decreases during /inancia! distress0
3+6 #cti%e %s+ passi%e portfolio management and performance e%al'ation
"i!!iam 20 Sharpe G'(('H discusses the arithmetic o/ acti&e management and argues that the return
on acti&e!. managed port/o!ios must on a&erage e1ua! the passi&e port/o!ioR that is the market
port/o!io0 This statement can a!so be sca!ed don to a particu!ar asset c!ass0 The !ogic is &er. simp!e,
and at /irst to in&estor t.pes are c!assi/iedD I6assi&eA that ho!d the market port/o!io, and I5cti&eA
hose ho!dings di//er /rom the market port/o!io0 %&er an. speci/ied time period, the market return
must e1ua! the eighted a&erage return on a!! securities in the market, and as the passi&e in&estor
i!! obtain precise!. that return, it is impossib!e /or acti&e in&estors in aggregate to de&iate /rom the
market return0 5s the /irst to returns are the same, the third must be a!so0 That !eads to his /irst
assertionD E:e/ore costs, the return on the a&erage acti&e!. managed do!!ar i!! e1ua! the return on
the a&erage passi&e!. managed do!!arF0 This direct!. imp!ies his second assertionD E5/ter costs, the
return on the a&erage acti&e!. managed do!!ar i!! be !ess than the return on the a&erage passi&e!.
managed do!!arF0 2urthermore he suggests that the best a. to e&a!uate the per/ormance o/ an
acti&e port/o!io is b. comparing it ith a /easib!e passi&e a!ternati&e0
In another paper, Sharpe and 6ero!d G'((BH e-amines and compares a set o/ d.namic
strategies /or asset a!!ocationD I:u.#and#8o!dA, I$onstant#7i-A, I$onstant proportion port/o!io
insuranceA and I%ption based port/o!io insuranceA0 This thesis sha!! /ocus on the /irst to strategies0
5 I:u.#and 8o!dA strateg. is a passi&e strateg. characteri?ed b. an initia! mi- o/ assets that are
bought and he!d ithout reba!ancing, in contrast to the I$onstant#7i-A strateg. that is acti&e in the
sense that it maintains the same proportion o/ assets o&er time0 Each strateg.As per/ormance is
10

e&a!uated in the case o/ /!at markets, bu!!Nbear markets and in the case o/ &o!ati!eN!ess &o!ati!e
markets0 5 I$onstant#7i-A strateg. imp!ies se!!ing assets as the. appreciate in &a!ue, and bu.ing them
as the. depreciate, to keep the ratios constant o&er time0 In &o!ati!e markets ithout an. trend, this
strateg. i!! outper/orm as it takes ad&antage o/ Ese!!ing high and bu.ing !oF0 8oe&er i/ there is a
bu!! or a bear market, the I:u.#and#8o!dA strateg. i!! be more success/u! as re&ersa!s are sma!! and
re!ati&e!. in/re1uent, and the margina! bu. or se!! ca!!s in the I$onstant#7i-A port/o!io i!! o/ten turn
out to be poor!. timed0 "hich strateg. is then the bestS The anser is that no strateg. can be said to
the best /or e&er.one, as it depends on the strateg.As e-pected pa.o// compared ith the in&estorAs
risk to!erance and e-pectations0
There is much !iterature on hat the appropriate per/ormance e&a!uation measure is /or
predicting port/o!io returnsD <akamou!ine ; =oekebakker G2,,(H ackno!edge the common use o/
the Sharpe ratio based on the 7ean#Kariance theor. Gas presented in Section 2H, but a!so state that it
is a &a!id prediction measure on!. hen there can be an accurate measurement o/ the standard de&iation
o/ returns, together ith a norma! return distribution0 It is /urther discussed ho di//erent research
rep!aces the standard de&iation ith other measures o/ the port/o!ios risk, such as donside
de&iation or the concept o/ KaR0 5nother e-amp!e is 2orine!!i et a! G2,,)H ho use di//erent
per/ormance measures accounting /or non#norma!it. in returns in order to /ind the optima! measure
to predict returns.
2or the purpose o/ the case stud.D It is not intended to pro&e the prediction abi!it. o/ the
Sharpe ratio on port/o!io per/ormance, but instead ho di//erent port/o!ios ha&e per/ormed
according to the Sharpe ratio o&er time0 8ence, the Sharpe ratio i!! not be comp!emented b. other
per/ormance measures0 2urther there is a distinction made hether the port/o!ios are I5cti&eA or
I6assi&eA, ith a!! I5cti&eA port/o!ios being o/ the nature I$onstant#7i-A /o!!oing Sharpe and 6ero!d
G'((BH0
3+7 4oment'm in asset ret'rns
2o!!oing the paper b. 9ebondt and Tha!er G'()BH discussing the stock markets o&erreaction to
ne in/ormation, Qagadeesh and Titman G'((3H used stock market data to document strong
momentum e//ects, /or e-amp!e as the inners in the past @ months outper/ormed the market b. an
a&erage cumu!ati&e return o/ (0B T p0a0 beteen the .ears '(@B + '()(0 Three .ears !ater, 2ama and
2rench G'((@H /ound support /or the /act that short#term inners tend to outper/orm the market0
5n e-tension o/ this that is high!. re!e&ant to the case stud. are the resu!ts o/ :!it? and K!iet G2,,)H
ho in&estigate momentum e//ects in terms o/ returns and Sharpe ratios across asset c!asses0 It is
11

c!aimed that the app!ication o/ momentum to g!oba! tactica! asset a!!ocation across '2 asset c!asses
Ginc!uding US in&estment grade and high .ie!d bondsH de!i&ers statistica!!. signi/icant abnorma!
returns0 It is a!so shon that a '2 minus ' month momentum strateg. Gin&esting in the best
per/orming port/o!ios in the past '2 months e-c!uding the most recentH .ie!ds on a&erage a return o/
*0( T p0a0 This approach resemb!es that o/ the acti&e port/o!io in the case stud., hich is presented
in greater detai! in Section @040

12

6+ $ata
The data consist o/ a stock market inde-, indices /or in&estment grade and high .ie!d bonds, the
price o/ "TI#$rude %i! and go!d0 The data set starts in '()@ or at the inception o/ the particu!ar
inde-, ranging through the beginning o/ 2,'30 5s an inde- is used to pro-. the stock and bond
markets, transaction costs are not inc!uded0
6+1 Stock market
5s a pro-. /or the stock market, the S;6 B,, inde- is chosen0 2irst pub!ished in '(B), the S;6 B,,
is a broad, &a!ue#eighted stock inde- consisting o/ the B,, !argest pub!ic!. traded companies in the
US and is the most ide!. used benchmark o/ stock market per/ormance in the industr.
3
0 This inde-
is pre/erred abo&e a or!d inde- such as 7S$I#"or!d since the stud. is /ocused on the US market0
The stud. uses month!. return data, co!!ected /rom "R9S0
In order to conduct a robustness test, to additiona! stock indices are usedD the Casda1
$omposite that consists o/ o&er 3,,, companies traded on the C5S95U stock e-change, and the
7S$I#US In&estab!e that consists o/ 2B,, stocks representing () T o/ market capita!isation in the
US0
4
These to indices ere chosen o&er 9o Qones Industria! 5&erage G9QI5H since the. are both
&a!ue#eighted, compared to the 9QI5 that is a price#eighted inde- on!. containing 3, stocks0
:oth indices as co!!ected /rom :!oomberg0
6+2 Bond markets
The bond indices presented be!o represent a broad bond port/o!io and are rep!icab!e, either
through bu.ing the bonds direct!. or through an E-change#Traded#2und GET2H0 This data as
co!!ected /rom the St0 Louis 2edera! Reser&e, and a more comprehensi&e description o/ these indices
is presented be!oD
GiH 7erri!! L.nch US $orp 7aster Tota! Return Inde- Ka!ue G7LI3H
Used as pro-. /or in&estment grade bonds in the US market0 The inde- inc!udes corporate debt,
treasuries, agenc. issued debt and asset backed securities0 The maturities o/ the bonds are mi-ed,
pro&iding month!. obser&ations /or the tota! returns in the period '()B + 2,'30
GiiH 7erri!! L.nch 8igh Vie!d 7aster II G7L8VH

3
G9e7ar?o, 2,,(H
4
httpDNN0msci0comNproductsNindicesNcountr.WandWregiona!NdomesticWe1uit.WindicesNusNde/initions0htm!,
co!!ected 2,'3#,B#,'
13

$onsists o/ corporate debt issued in the US ith a credit rating /rom 7ood.AsNS;6 !oer than
:aa'N::J or :a'N:::J0 It is an inde- used b. the St0 Louis 2edera! Reser&e as benchmark /or
the high .ie!d bond market pro&iding month!. returns in the period '()B + 2,'30
6+3 "ommodities markets
There is a ide range o/ natura! resources acti&e!. traded in the /inancia! markets, and this stud. uses
to o/ the commodities most common!. tradedD "TI#$rude %i! and go!d0 These are chosen due to
their high re!ati&e eights in the 3o!dman Sachs $ommodit. Inde- G3S$IH that is /re1uent!. used
to pro-. the commodities market, and since go!d is the main /ocus /or one o/ the or!dAs !argest
ET2s0 In&estments in these assets can be either ph.sica! or non#ph.sica! &ia /utures contracts or
ET2s0 This data as co!!ected /rom :!oomberg0
6+6 -ther data
2or the purpose o/ this stud., the /o!!oing data is used in order to in&estigate the dri&ers behind
the changes in corre!ationD
!i" $itigroup Li1uidit. inde-
5 measurement o/ market !i1uidit.D the higher the &a!ue, the !ess !i1uidit. on the market0 The
measurement takes &a!ues beteen , and ', and the /ormu!a behind the inde- is /ound in the
5ppendi-0 This inde- as co!!ected /rom :!oomberg0
!ii" S;6 B,, Ko!ati!it. Inde- GThe KIM inde-H
The KIM inde- is based on imp!ied &o!ati!it. o/ the S;6 B,,, or more speci/ica!!. the risk
neutra! e-pectation o/ the S;6 B,, &ariance o&er the ne-t 3, da.s0 The measure is 1uoted as
annua!i?ed standard de&iations, and the data as co!!ected /rom "R9S0
!iii" Risk#/ree interest rate
In order to accurate!. ca!cu!ate the Sharpe ratios in the case stud., a pro-. /or the risk#/ree
interest rate as co!!ected /rom "R9S under the databaseD E2ama#2rench 2actorXsF and it is
the annua! return rate on a three#month T#:i!!0
14

6+7 "rises definitions
In order to stud. ho corre!ation &aries ith the onset o/ crises, the /o!!oing crises de/initions are
usedD
(i) $otcom crisis
This is de/ined as the bear market /rom !ate 7arch in 2,,, unti! the S;6 B,, reco&ered in
%ctober 2,,20 7ore speci/ica!!.D #$ March #%%% & ' (ctober #%%#.
(ii) S'&prime crisis
This period is considered to start in mid#summer 2,,* as the subprime crisis begins to un/o!d
and /inancia! institutions and companies around the or!d begin to de/au!t0 The crisis period is
de/ined to !ast unti! mid#2,,(, hen the stock market shoed signs o/ reco&er.0 7ore
speci/ica!!.D ) ugust #%%* & +% ,une #%%'.
(iii) So%ereign de&t crisis
This period is considered to start hen 3reece is dongraded to >unk bond status b. Standard
and 6oorAs during Qune 2,''0 The period is /or this thesis de/ined as +% ,une #%)) & +) -ec #%)#.
To supp!ement the periods abo&e, the /o!!oing pre# and post#crisis periods are de/ined in order
to stud. the actua! e//ect hen the crises hit0 These periods are de/ined to ha&e appro-imate!.
the same duration as the crises periods0
iH 6re 9otcom crisis
) ,anuary )''.- #$ Mars #%%%
iiH 6ost 9otcom crisis
' (ctober #%%#- +) -ecember #%%$
iii" 6re subprime crisis
) ,anuary #%%/ -+% ,une #%%*
i&H 6ost subprime crisis
+% ,une #%%'- +% ,une #%))

15

7+ 8!potheses
This thesis uses a top don approach, here the corre!ation stabi!it. in returns on the S;6 B,, and
the bond indices and the return on the S;6 B,, and the commodities are /irst ana!.sed o&er the
entire samp!e period, '()@ + 2,'3, to determine hether the /irst h.pothesis can be re>ectedD
8!pothesis 1( The correlation in ret'rns &et*een the stock market and the specified asset
classes is constant thro'gh 19:; < 2013+
2o!!oing a re>ection o/ 8.pothesis ', a c!oser e-amination is made o/ the stabi!it. o/ this
corre!ation during periods o/ crisis, as de/ined in Section 40B0
8!pothesis 2( The correlation in ret'rns &et*een the stock market and the specified asset
classes is not affected o%er crisis periods+
2o!!oing 8.pothesis 2, the 9otcom and Subprime#crises i!! be ana!.sed in more detai! in order to
in&estigate i/ an. o/ the /actors de/ined in Section 404 can e-p!ain potentia! changes in corre!ation
during times o/ crisis0 This !eads to the ne-t h.pothesisD
8!pothesis 3( The correlation in ret'rns &et*een the stock market and the specified asset
classes is not affected &! market li3'idit! or changes in market %olatilit!+
These three h.potheses are /o!!oed b. a case stud., hich aims to 1uanti/. the actua!
bene/its o/ cross#asset c!ass di&ersi/ication during the period '()* + 2,'20 5s speci/ied, an increase
in the corre!ation o/ asset returns i!! direct!. increases the risk o/ the port/o!io0 2rom Section 20' it
/o!!os that an in&estorAs ob>ecti&e is to ma-imi?e his Sharpe ratio Gs!ope o/ the $5LH that is returns
in re!ation to risk0 I/ the return corre!ations ere constant, the Sharpe ratio o/ di//erent port/o!ios
ou!d be predictab!e, and there/ore it ou!d be possib!e to see a c!ear pattern on hen to reba!ance
the port/o!io0 The case stud. i!! e&a!uate the per/ormance o/ the indi&idua! asset c!asses compared
to a set o/ acti&e port/o!ios in terms o/ their .ear!., rea!i?ed Sharpe ratios, in order to 1uanti/. the
historica! di&ersi/ication bene/its o/ the di//erent assets o&er time in genera!, and during crises in
particu!ar0
"ase st'd!( E%al'ate the historical cross-asset class di%ersification &enefits o%er time
in general and d'ring crises in partic'lar0 in terms of the portfolios Sharpe ratios+

16

;+ 4ethodolog!
In this section, ho the di//erent h.potheses are tested and ho the case stud. is per/ormed is
presented in greater detai!0 To get a better understanding o/ ho the di//erent regressions are run, a
description i!! /irst be presented o/ the a. in hich autocorre!ation amongst the error terms as
reso!&ed0
;+1 =e*e!->est standard errors
5s i!! be presented !ater in this section, mo&ing and ro!!ing estimation indos are used /or the
return corre!ations, hich gi&e rise to the prob!em o/ autocorre!ation, that is that the corre!ation in
period C is a//ected b. the corre!ation in period C#'0 5 method to reduce this e//ect as de&e!oped
b. Cee. and "est G'()*H, hich uses a positi&e, semi#de/inite, heteroskedasticit. and
autocorre!ation#consistent co&ariance matri- to reduce the autocorre!ation /rom an ordinar.#!east#
s1uare G%LSH regression0 The %LS#regression rests on se&era! assumptions, hich can be partia!!.
reso!&ed b. using this a!ternati&e approach0 The Cee.#"est standard errors are ca!cu!ated
dependant on a choice o/ ma-imum !ag, hich is ca!cu!ated /rom a distributed !ag o/ the %LS#
residua!s, and this is chosen to match the actua! indo !ength hen per/orming the tests0 The use
o/ Cee.#"est standard errors i!! be robust to arbitrar. departures /rom homoskedasticit., hich
is one under!.ing assumption in %LS#regressions0 This i!! in /act bring higher standard errors to
the regressionsR hoe&er the resu!ts i!! be more re!iab!e0
;+2 Testing for constant correlation o%er time0 19:; < 2012
<i&ot and "ang G2,,3H discuss the common use o/ ro!!ing ana!.sis o/ time#series data, and assert
that i/ parameters are tru!. constant, that the estimates o&er a /i-ed si?e ro!!ing indo shou!d then
not be too di//erent0 This method is used b. $oaker G2,,@H to stud. corre!ation &o!ati!it. o&er time,
and i!! be used in this stud.0 5nother method discussed as common in the ana!.sis o/ /inancia!
time#series data in particu!ar is the use o/ a mo&ing indo Gor mo&ing a&erage indoH, here the
indo is s.mmetric around the particu!ar obser&ation, and here the estimate is the aggregate
corre!ation ithin the indo0 To reach a stronger conc!usion, both non#o&er!apping ro!!ing
indos o/ '2 months, as used b. $oaker G2,,@H, and mo&ing indo corre!ation estimations are
graphed and ana!.sed0 5s the si?e o/ the indo has a strong impact o/ the resu!ts, particu!ar!. in
the mo&ing indo corre!ation estimations, three di//erent indo si?es are usedD @, 24 and @,
months, to high!ight the di//erencesR hoe&er the main /ocus i!! be on the 24 month indo0
17

In order to 1uanti/. these resu!ts /urther, the /o!!oing regression ith Cee.#"est
standard errors is run ith the corre!ation beteen the stock market return and asset returns GMH as
the dependent &ariab!e, and .ear!. dumm. &ariab!es co&ering the entire time#series, to see i/ there are
certain periods that more strong!. a//ects the corre!ationD

p
Stock mukct;X
= o + [
1
- ummy1 + [
2
- ummy2 ++ e G@020'H
I/ the corre!ation is constant, no indi&idua! dumm. ou!d pro&ide more signi/icant resu!ts than
another0 The regression is run ith corre!ation &a!ues /rom a '3 months mo&ing indo, hich is @
months be/ore and a/ter each indi&idua! obser&ation0 Thus, the !ag speci/ied as @ months0
5!! regressions in this thesis are run ith a indo and !ag as speci/ied abo&e0
;+3 Testing if the correlations are 'naffected d'ring crises periods
5 regression ith Cee.#"est standard errors is run ith corre!ation as the dependent &ariab!e on
three c!ustered dumm. &ariab!esD 5 I$risisA dumm. consisting o/ the obser&ations during a speci/ied
crisis, and simi!ar!. the periods be/ore and a/ter crises periods are grouped into the dumm. &ariab!esD
E6re $risisF and E6ost crisisF, respecti&e!.0 This regression pro&ides the /irst insight into ho the
di//erent asset c!asses return corre!ations changes ith the onset o/ crises, and hat asset c!asses
appears to be more a//ected than others0 The regression be!o is run /or a!! asset returns
corre!ations ith the return on the stock marketD
p
Stock mukct;X
= o + [
1
- Prc Crisis + [
2
- Crisis + [
3
- Post Crisis + e G@030'H
5s the particu!ar crises are studied in more detai!, a regression ith Cee.#"est standard errors is
run simi!ar to @030' but ithout grouping the periods0 2o!!oing this regression, it can be high!ighted
i/ an. particu!ar periods more strong!. a//ect the corre!ation in returns beteen the stock market and
the asset c!asses0 The regression is speci/ied asD
p
Stock mukct;X
= o + [
1
- Prc otcom+ [
2
- otcom+ [
3
- Post Jotcom+ [
4
-
Prc Subprimc + [
5
- Subprimc + [
6
- PostSubprimc + [
7
- So:crcign + e G@0302H
The regression is accompanied b. a graphica! i!!ustration o/ the mo&ing indo corre!ations during
the time be/ore, during and a/ter the speci/ic crises, to i!!ustrate i/ the corre!ation remains at a certain
!e&e! throughout the crisis periods0
18

;+6 Testing if the correlations are 'naffected &! market factors
In !ine ith the methodo!og. presented /or testing 8.potheses ' and 2, a regression is run ith
Cee.#"est standard errors ho!ding the corre!ation beteen the stock market and asset returns as
the dependent &ariab!e, and the month!. change in the parameters /rom Section 404 as the
e-p!anator. &ariab!es0
The !i1uidit. !e&e! is ca!cu!ated as the mo&ing a&erage o&er the same indo as the mo&ing
corre!ation, that are using @ months be/ore each obser&ation and @ months a/ter0 The changes in
&o!ati!it. is ca!cu!ated in to steps, /irst b. creating a mo&ing a&erage o/ &o!ati!it. using the same
indo as abo&e, and then b. creating return b. di&iding obser&ation C ith obser&ation C#'0 This
methodo!og. so!&es the prob!em o/ comparing a spot price ith a mo&ing a&erage, as on!. mo&ing
a&erages are compared0 It is a!so emphasi?ed that this approach might resu!t in regression
coe//icients abo&e ' or be!o #', seen in [
1
and [
2
be!o, but gi&en the sma!! number on the
Li1uidit. !e&e! and the change in &o!ati!it., the corre!ation i!! a!a.s remain in the range o/ #' to '0
The regression is speci/ied asD

p
Stock mukct;X
= o +[
1
- IiquiJity + [
2
- A Iolotility + e G@040'H
;+7 "ase st'd!( #ssessing the &enefits of di%ersification
The aim o/ this stud. is to sho hat asset c!asses ha&e pro&ided the best di&ersi/ication bene/its
o&er the 2B .ear period '()B + 2,'20 5s shon in Section 2, the corre!ation beteen assets
u!timate!. determines the risk o/ the port/o!io, and i/ in&estors are assumed to act rationa!!., the. are
on!. concerned about return in re!ation to risk0 The Sharpe ratio measures this re!ationship, and is
chosen to e&a!uate the per/ormance o/ the set o/ port/o!ios, to understand hich port/o!ios that
pro&ided the best return in re!ation to risk on a .ear!. basis0 The resu!ts are ana!.sed through the
perspecti&e o/ the resu!ts /rom 8.pothesis ' + 3, to conc!ude the actua! di&ersi/ication bene/its /rom
di&ersi/ication as corre!ation changes o&er time, and during particu!ar crisis periods0 This measure
as chosen based on the assumption o/ in&estorsA rationa!it. Gabo&eH, and it is one o/ the measures
used b. :!it? and K!iet G2,,)H to e&a!uate the per/ormance o/ momentum strategies across asset
c!asses0
This stud. compares the per/ormance o/ a port/o!io that is acti&e!. reba!anced e&er. .ear,
based on the combination o/ asset c!asses that per/ormed the best in the pre&ious .ear, hich is a
19

modi/ied but sti!! simi!ar approach to that o/ :!it? and K!iet G2,,)H, ith the /o!!oing set o/ passi&e
Y6Z and acti&e I$onstant#7i-A Y$7Z port/o!ios, c!assi/ied on the basis o/ Sharpe and 6ero!d G'((BHD

iH 9i&ersi/ied port/o!io ith e1ua! eights G2,TH in stocks, in&estment grade and high .ie!d
bonds, oi! and go!d Y$7Z
iiH :ond port/o!io GB, T in in&estment gradeNhigh .ie!d bond port/o!io respecti&e!.H Y$7Z
iiiH Stock port/o!io G',, T in the S;6 B,,H Y6Z
i&H Stock and bond port/o!io GB, T in the Stock and :ond port/o!io respecti&e!.H Y$7Z
&H In&estment grade bond port/o!io G',, TH Y6Z
&iH 8igh .ie!d bond port/o!io G',, TH Y6Z
&iiH 3o!d port/o!io G',, TH Y6Z
&iiiH %i! port/o!io G',, TH Y6Z
i-H 5&erage optima! port/o!io G34 T in the in&estment gradeNhigh .ie!d bond port/o!ios
respecti&e!., ( T in the stock port/o!io and '2 T in the 3o!d and %i! port/o!ios
respecti&e!.H Y$7Z
The case stud. is carried out in E-ce!, and uses the month!. return data as speci/ied in Sections 40',
402 and 4030 5s Sharpe ratios are e&a!uated on a .ear!. basis, the month!. return is compounded to
get the .ear!. returns /rom each asset c!ass, and a co&ariance matri- is constructed on a .ear!. basis,
based on the return data in each .ear Gthat is 2B matrices in tota!H0 The stud. starts out b. /inding the
optima! eights in each asset c!ass e&er. .ear to produce the highest possib!e annua! Sharpe ratio0
2or this purpose, a second Ieighted co&ariance matri-A is set up /or each .ear, based on the /ormer
co&ariance matri-, and the eights in each asset c!ass0 The sum o/ this eighted co&ariance matri- is
the port/o!io &ariance, and the standard de&iation is the s1uare root o/ the port/o!io &ariance0 The
return o/ the port/o!io is the simp!e eighted a&erage o/ the asset returns, ca!cu!ated /rom the .ear!.
returns and the eights in each asset c!ass0 5s the Sharpe ratio uses e-cess returns, the a&erage risk#
/ree rate as ca!cu!ated on a .ear!. basis Gspeci/ied in Section 404H, and subtracted /rom the port/o!io
return, thus creating port/o!io e-cess returns on a .ear!. basis0 The Sharpe ratio is ca!cu!ated b.
di&iding this port/o!io e-cess return ith its standard de&iation0 To /ind the optima! port/o!io, the
So!&er /unction is used to ma-imi?e the Sharpe ratio direct!., b. changing the port/o!io eights, as
the. u!timate!. determine both the standard de&iation and return on the port/o!io0 5 constraint as
20

put on the eights to be in the range o/ , T + ',, T, and that the tota! eights had to sum up to
',, T, thus imp!ementing a short#sa!e and borroing constraint /or the port/o!io0
To /ind the Sharpe ratios o/ port/o!iosD i, ii, i& and i-, the same procedure ith a eighted
co&ariance matri- is constructed on a .ear!. basis, hoe&er ho!ding the eights in each asset c!ass
/i-ed Ghence a I$onstant#7i- port/o!ioH0 The sum o/ the co&ariance matrices constitutes the &ariance
on each port/o!io, and the Sharpe ratio is simi!ar!. the eighted a&erage o/ the .ear!. returns !ess the
a&erage .ear!. risk#/ree rate, di&ided b. the s1uare root o/ the port/o!io &ariance0
The Sharpe ratios /or port/o!ios ii, iii, &, &i, &iiH and &iii, is the .ear!. e-cess returns, di&ided
b. the .ear!. standard de&iations o/ returns0
To measure the per/ormance o/ the acti&e port/o!io reba!anced each .ear based on the
optima! port/o!io, a eighted co&ariance matri- is set up /or each .ear, using the eights /rom .ear
C#', and the e-cess return is ca!cu!ated using the same optima! eights /rom .ear C#', and the
return and risk#/ree rate in .ear C0
5s the stud. is per/ormed on a .ear!. basis, there is a need to de/ine entire .ears as crisis periods, as
e!! as pre# and post#crisis periods, in order to ana!.se ho the Sharpe ratios are a//ected o&er the
crises c.c!es0 The ne, broader de/initions are presented be!oD
aH 6re 9otcomD '(() and '(((
bH 9otcom crisisD 2,,,, 2,,'and 2,,2
cH 6ost 9otcomD 2,,3 and 2,,4
dH 6re SubprimeD 2,,B and 2,,@
eH Subprime crisisD 2,,* and 2,,)
/H 6ost SubprimeD 2,,( and 2,',
gH So&ereign debt crisisD 2,'' and 2,'2
In order to i!!ustrate the best di&ersi/ication bene/its, the month!. return on the port/o!ios ith the
highest Sharpe ratios during the speci/ic crises are graphed0
;+; /o&'stness test
In order to conduct a robustness test o/ the stud., 8.potheses 2 and 3 as re#tested ith ne
pro-ies /or the stock market0 5s the stud. takes the &iepoint o/ an e1uit. in&estor, it is determined
hether the resu!ts are robust in the sense that the same resu!t ou!d app!. to a broader set o/
e1uit. in&estors, e0g0 using a!ternati&e stock indices0 The ne pro-ies /or the stock market are
21

described in Section 40'0 5!! other data remain the same, as does the methodo!og. in testing the
h.potheses0
;+? 5ro&lemati2ation
The /irst ob&ious prob!em ith the methodo!og. described abo&e is that o/ autocorre!ation0 This
prob!em is tack!ed as described in Section @0' b. the use o/ Cee.#"est standard errors0 8oe&er
the prob!em is not comp!ete!. reso!&ed0 There a!so e-ist some prob!ems ith endogeneit. since
there might be a number o/ parameters in the error term o/ especia!!. the !i1uidit. and &o!ati!it. data0
It can a!so be assumed that a !ot o/ other /actors corre!ate ith these to parameters in times o/
crisis0
The choice o/ Sharpe ratio as the risk#ad>usted return measure /or the purpose o/ the case
stud. can a!so be 1uestioned, and se&era! other measures e-ist, such as the Tre.nor ratio and the
7odig!iani risk#ad>usted per/ormance /rameork GR56H0 Sharpe ratio as chosen o&er the Tre.nor
ratio since the !atter on!. takes into account market risk G[H0 The R56#/rameork has some
ad&antages o&er the Sharpe ratio, main!. that it 1uanti/ies the risk#ad>usted return as percentages,
hoe&er it as re>ected since the Sharpe ratio has a stronger connection ith the theoretica!
/rameork presented0 2urthermore, the R56#/rameork is partia!!. deri&ed /rom the Sharpe ratio0
5nother criticism o/ the Sharpe ratio is the scepticism o/ the e-istence o/ a risk#/ree rate0
8oe&er, /inance theor. re!ies on the e-istence o/ a risk#/ree rate and this prob!em i!! a!a.s be
present no matter hich risk#ad>usted measure that is chosen0

22

?+ /es'lts
This section i!! present the resu!ts obtained /or the h.potheses and the case stud.0 The discussion
and interpretation o/ these /indings i!! be presented in Section )0 5n initia! i!!ustration o/ the
returns on the di//erent asset c!asses /rom '()@ to 2,'3 is shon in 2igure ', and it is c!ear that the
stock market outper/ormed the other asset c!asses in terms o/ returns during the '((,s, !osing some
o/ this outper/ormance during the 2,,,s0
?+1 "onstant correlation test res'lts
2o!!oing the ca!cu!ation o/ three di//erent mo&ing corre!ation indos, the graphica! resu!ts o/ the
24 month corre!ation indo beteen the stock and bond markets and the stock and commodities
markets are presented in 2igures 2 and 4 respecti&e!.0 The ro!!ing '2 month corre!ation indos in
1uestion are presented in 2igures 3 and B respecti&e!.0 The graphs match up e!!R the main
di//erence is that the ro!!ing indos sho sharper sings due to /eer obser&ations0 3raphica!
i!!ustrations o/ the resu!ts /rom the @ and @, month mo&ing indo can be /ound in the 5ppendi-0
The corre!ation beteen the stock# and high .ie!d bond markets di&erges in corre!ation /rom
the stock# and in&estment grade bond markets in the 2,,,s, e-hibiting consistent!. higher !e&e!s o/
corre!ation0 2rom this graphica! i!!ustration, it appears as i/ the corre!ation beteen the stock and
bond markets is not particu!ar!. stab!e o&er time0
The corre!ation beteen the stock# and commodities markets e-hibits a higher rate o/
&ariabi!it. than the stock# and bond market, and a!so a genera!!. !oer !e&e! o/ corre!ation0 5s in the
case o/ the stock# and bond markets corre!ation, it supports a re>ection o/ the h.pothesis that
corre!ation is in /act constant o&er time0
These graphica! i!!ustrations o/ a non#stab!e corre!ation are supported b. the descripti&e
statistics in Tab!e ', hich e-hibit a high !e&e! o/ &ariance in the corre!ation coe//icients, ith
ma-imum !e&e!s o/ corre!ation being &er. high /or a!! assets, and a!so strong!. negati&e !e&e!s o/
corre!ation as a minimum0
Running regression @020' ith Cee.#"est standard errors shos that some .ears ha&e
signi/icant!. stronger e-p!anator. e//ects than others on each o/ the corre!ations, signi/icant on a B
T !e&e!, as presented in Tab!e 20

This test together with the graphical investigation leads us to re0ect 1ypothesis ) and to conclude that correlation is
neither constant nor stable over time.
23

?+2 The effect of crises periods on correlation
5s corre!ation as pro&en to &ar. signi/icant!. o&er time, the /ocus is no shi/ted toards
corre!ation changes in times o/ crisis0 The resu!ts /rom Regression @030' ith Cee.#"est standard
errors that inc!uded the three c!ustered dumm. &ariab!esD I$risisA, I6re#crisisA and I6ost#crisisA are
presented in Tab!e 30 The stock market corre!ation ith in&estment grade bonds remains at !o
!e&e!s o&er the crises, and it e&en shos that corre!ation i!! decrease in times o/ crises, and in the
post#crisis period, that the corre!ation decreases e&en /urther, as the in&estment grade bonds do not
/o!!o the stock market in the bu!! market reco&er. /o!!oing the crises0 This is i!!ustrated in 2igure
'0 5!! resu!ts /rom the in&estment grade bond market are signi/icant at the ' T !e&e!0
The high .ie!d bond market i!! becomes increasing!. corre!ated ith the stock market
during times o/ crisis, hoe&er the signi/icance is !oer G'* TH0 In times a/ter crises the corre!ation
dec!ines, but at a !e&e! that is not as statistica!!. signi/icant0 8oe&er, this presents a pattern that
suggests that during crises the corre!ation increases as the returns on both the high .ie!d bond# and
stock market are negati&e0 Thus a di//erence beteen the bond markets, here in&estment grade
bond corre!ation decreases ith the stock market during and a/ter crises is obser&ed, hereas the
high .ie!d bond corre!ation appears to increase during crises0
"TI#$rude %i! shos !itt!e to no signi/icance in e-p!aining corre!ation di//erences o&er
periods o/ crisis, hereas go!d decreases its corre!ation ith the stock market during crisesR hoe&er
this is on!. signi/icant at the 'B T !e&e!0
Tab!e 4 shos the regression resu!ts /rom regression @0302 and pro&ides more detai!ed
in/ormation /or the speci/ic crises0 5round the 9otcom crisis the corre!ation beteen the stock
market and in&estment grade bonds decreases during the actua! crisis period, a resu!t that is
signi/icant e&en be!o the ' T !e&e!0 This is a!so &isua!ised in 2igure @0 5round the Subprime crisis,
the corre!ation increases s!ight!., but it remains at !o !e&e!s throughout the crisis c.c!e0 2igure )
shos ho the corre!ation decreases in the beginning o/ the crisis, be/ore it increases toards the
end o/ the period, decreasing again a/ter the crisis0
The high .ie!d bond market shos di//erent resu!ts, ith a strong increase in corre!ation
during both the Subprime and So&ereign debt crisis, as there is a strong increase in corre!ation,
signi/icant at the ' T !e&e! in both cases, as disp!a.ed in Tab!e 40 2igure ) shos ho there is an
aggregate increase in corre!ation during the Subprime crisis0
3o!d shos a strong decrease in corre!ation during the So&ereign debt crisis hich is
signi/icant be!o the ' T !e&e!0 9uring the Subprime crisis the corre!ation a!so decreases, hoe&er at
24

a !ess signi/icant !e&e!, '@ T0 2igure ( shos ho the corre!ation beteen go!d and the stock market
trends donards going into the Subprime crisis, and ho the corre!ation seems to increase a/ter
the crisis0
The changes in corre!ation during times o/ crisis /or "TI#$rude %i! and the stock market
shos a !ack o/ signi/icance in Tab!e 4, and /rom 2igure * and 2igure ( no c!ear trend can be
obser&ed0
2rom these results, we re0ect 1ypothesis # in the sense that correlation is unaffected during crises for investment grade
and high yield bonds as well as gold. 2or 3T4-Crude (il, we cannot re0ect 1ypothesis #.
?+3 The effect of market parameters on correlation
2o!!oing the resu!ts /or 8.pothesis 2, it is shon that in&estment grade bonds decreased its
corre!ation ith the stock market during and a/ter the 9otcom crisis, and resisted the increase in
corre!ation during the Subprime crisis that high .ie!d bonds e-perienced0 3o!d decreased in
corre!ation ith the stock market during the Subprime and So&ereign debt crises, and these resu!ts
!ead us to /ocus 8.pothesis 3 toards those to asset c!asses, to understand h. there ha&e been
di&ersi/ication bene/its /rom in&estment grade bonds and go!d0
The resu!ts /rom regression @040' are presented in Tab!e B0 9uring the 9otcom crisis the
!i1uidit. !e&e! has a signi/icant e//ect on the corre!ation beteen the stock market and both asset
c!assesR hoe&er the e//ect is much stronger on in&estment grade bonds0 This indicates that as
!i1uidit. is reduced in the market, the corre!ation decreases, and /o!!oing 8.pothesis 2 it is seen
that the corre!ation decreases beteen the stock market and in&estment grade bonds during the
9otcom crisis0
The changes in &o!ati!it. do not ha&e an. e-p!anator. e//ects during the same crisis0 9uring
the Subprime crisis the dominant e//ect stems /rom the changes in the market &o!ati!it. !e&e!, and as
the &o!ati!it. increases in the market, the corre!ation decreases beteen the stock market and the
asset c!asses, the e//ect being higher /or go!d than /or in&estment grade bonds0 This decrease in
market !i1uidit. Gor the increase in the !i1uidit. premiumH positi&e!. a//ects the in&estment grade
bond marketAs corre!ation ith the stock market during this crisis, and the opposite is true /or the
corre!ation beteen go!d and the stock market0
2rom these results, we re0ect 1ypothesis + as both li5uidity and changes in volatility significantly affects the correlation
during crisis periods6 however there are differences in the effects between the different crises.
25

?+6 "ase st'd! res'lts
2o!!oing the re>ection o/ 8.pothesis 2 /or a!! asset c!asses apart /rom "TI#$rude %i!, the /ocus
no shi/ts toards the actua! bene/its o/ di&ersi/ication during the 2B .ear#period '()* + 2,'2 in
order to understand hether there is a direct e//ect on in&estment management /rom changes in
corre!ation0 5t /irst the summar. statistics are presented, be/ore getting into ho the optima!
port/o!io &aries in composition0 It is then e-p!ored ho the di//erent port/o!ios per/ormed at the
onset o/ crises in genera! and during the speci/ic crises in particu!ar0
?+6+1 S'mmar! statistics
I/ an in&estor cou!d per/ect!. anticipate changes in the /inancia! markets and then position himse!/
according!., it ou!d be possib!e to achie&e the optima! Sharpe ratio each .ear0 The descripti&e
statistics o/ a!! port/o!ios are presented in Tab!e @, the .ear!. Sharpe ratios o/ a!! port/o!ios are
presented in Tab!e * and the .ear!. composition o/ the optima! Sharpe ratio is presented in Tab!e )0
The optima! port/o!io under short#sa!e and borroing constraints shos an a&erage Sharpe ratio o/
30'@0 The port/o!io reba!anced each .ear a!ong the optima! eights in the pre&ious .ear .ie!ds an
a&erage Sharpe ratio o/ ,0)@, hich is simi!ar to the passi&e port/o!io that ho!ds a di&ersi/ied set o/
assets that a&eraged a ratio o/ ,0)B0 8oe&er, the &ariation in the di&ersi/ied port/o!io is the !oest
o/ a!! port/o!ios0 It is a!so shon that the a&erage optima! port/o!io is a di&ersi/ied port/o!io, ith
ho!dings in each o/ the di//erent asset c!asses, hoe&er ith the !oest ho!dings in the Stock
port/o!io0
The highest Sharpe ratios among the passi&e port/o!ios is /ound in the bond markets, here
the high .ie!d port/o!io .ie!ded the highest Sharpe ratios on a&erage G'0B,H, but ith a high &ariation0
The in&estment grade port/o!io pro&ed to be much sa/er, and sti!! pro&ided Sharpe ratios on a&erage
abo&e '0, G'0,4H0 The e1ua!!. eighted bond port/o!io per/ormed e!!, ith the sa/et. /rom the
in&estment grade bonds !imiting the donside, and the high .ie!d bonds pro&iding higher upsides,
.ie!ding an a&erage Sharpe ratio o/ '03,0
The stock market had a good decade in the '((,s, G'0B3H but crashed rather hard in the
2,,,s G,0'*H resu!ting in an a&erage Sharpe ratio o/ ,0**0 2or the broad e1uit. in&estor, it is pro&en
that there are strong gains to be made b. in&esting B, T o/ the port/o!ioAs &a!ue in the bond
port/o!ioD this strateg. sti!! outper/ormed the strong stock market in the '((,s, and !anded much
so/ter in the 2,,,s, .ie!ding Sharpe ratios o/ '0*3 and ,0@2 respecti&e!., /or an a&erage o/ '0,*0
$ommodities had the !oest Sharpe ratios on a&erage, much due to the high standard
de&iation in the returns0 3o!d had a particu!ar!. bad decade in the '((,s, but reco&ered in the 2,,,s,
26

ith Sharpe ratios o/ +,0)4 and ,0(' respecti&e!., /or the !oest a&erage o/ ,0,40 %i! per/ormed
second orst, ith an a&erage Sharpe ratio o/ ,02* o&er the samp!e period0
?+6+2 The portfolios performance d'ring crises in general
5s the case stud. as carried out on a .ear!. basis, the crisis de/initions /o!!o the speci/ication in
Section @040 In the pre#crisis periods, the best per/orming port/o!io as the di&erse and passi&e
port/o!io, ith e1ua! eights in a!! o/ the /i&e asset c!asses0 The in&estment grade bonds per/orm
rather bad!. during the pre#crisis periods, and the on!. to port/o!ios ith a negati&e Sharpe ratio
are the in&estment grade bonds and the e1ua!!. eighted bond port/o!io0 This hoe&er changes
dramatica!!. ith the onset o/ an actua! crisis period, here the re!ati&e per/ormance o/ the
port/o!ios changes substantia!!.0 The resu!ts sho that the orst per/ormer in pre#crisis periods
becomes the best per/ormer during crisis periods, as the in&estment grade bonds per/orm the best,
ith the high a&erage Sharpe ratio o/ '03B Gcomparing this ith the a&erage stock per/ormance ith
a ratio o/ +,0@*, puts this ratio into perspecti&eH0 Thus, there appears to be a !agging e//ect /rom the
bad per/ormance o/ the bond market into the stock market0 The second best per/ormance is shon
in the one#.ear reba!ancing port/o!ioR hoe&er this is due to the !arge ho!ding o/ in&estment grade
bonds during the 9otcom crisis in the optima! port/o!io Gsee Tab!e )H0
In post#crisis periods, the high .ie!d bonds are the best per/ormer, ith a &er. high a&erage
Sharpe ratio o/ 30'(, /o!!oed b. the a&erage optima! port/o!io and the e1ua!!. eighted bond
port/o!io0 Coticeab!e is the /act that a!! port/o!ios in the stud. sho Sharpe ratios abo&e '0, during
this reco&er. period0
?+6+3 $i%ersification &enefits d'ring the $otcom crisis
In the to#.ear period be/ore the 9otcom crisis, both the in&estment grade and high .ie!d bond
markets ere underper/orming compared to the stock market0 9uring the crisis period, this
re!ationship is re&ersed and the in&estment grade bond market is the best per/ormer0 This is
consistent ith the resu!ts /rom 8.pothesis 2, that the corre!ation decreased beteen the stock
market and in&estment grade bonds0 8ence, this corre!ation decrease is pro&en to direct!. a//ect the
per/ormance o/ the port/o!ios0 5s as a!so shon in the resu!ts /or 8.pothesis 2, the high .ie!d
bond market corre!ation ith the stock market increases during a crisis, hich ho!ds true a!so in this
stud. as the Sharpe ratios remain be!o ,0 This shos that in&estment grade bonds ere the best
possib!e di&ersi/ication during the 9otcom crisis in terms o/ reard#to#risk0 The period a/ter the
crisis is a time here the high .ie!d bond market takes o//, e&en more than the stock market, again in
27

!ine ith ear!ier tests, and the Sharpe ratio o/ the in&estment grade bonds dec!ine, hoe&er sti!! being
at positi&e !e&e!s0 The commodities markets sho a dec!ine in per/ormance during the crisis period,
indicating that the di&ersi/ication bene/its ere not as good as in the case o/ in&estment grade
bonds0 The month!. returns during the 9otcom crisis /or in&estment grade bonds, go!d and the
stock market are i!!ustrated in 2igure ',0 The &o!ati!it. in returns o/ in&estment grade bonds is
shon to be much !oer than /or go!d during this crisis0
?+6+6 $i%ersification &enefits d'ring the S'&prime crisis
:e/ore the crisis, the best per/ormance is /ound in the e1ua!!. eighted and di&ersi/ied port/o!io and
the a&erage optima! port/o!io0 The high .ie!d bond market a!so per/ormed e!!0 The pattern
pre&ious!. mentioned, ith negati&e Sharpe ratios on in&estment grade bonds in pre#crisis periods,
a!so ho!ds true /or the Subprime crisis0 5!though during the actua! crisis, the per/ormance o/
in&estment grade bonds increased, hoe&er there as sti!! a s!ight!. negati&e Sharpe ratio G#,0'@H as
the corre!ation ith the stock market did not decrease as much as during the 9otcom crisis, hich is
consistent ith the /indings o/ 8.pothesis 20 2o!!oing 8.pothesis 2, the best per/ormer shou!d be
go!d, as the corre!ation as shon to decrease during the Subprime crisis, something that pro&es to
ho!d, ith an a&erage Sharpe ratio o/ '0,B0 The orst per/orming port/o!ios are the stock# and high
.ie!d bond port/o!io, /indings that are a!so consistent ith the resu!ts /rom 8.pothesis 2,
high!ighting an important connection beteen the to asset c!asses0 The on!. port/o!ios that sho
positi&e Sharpe ratios during this crisis are the commodities and di&ersi/ied port/o!ios0 The period
a/ter the Subprime crisis is characteri?ed b. high and positi&e Sharpe ratios across a!! port/o!ios Ga!!
abo&e '0,H0 The month!. returns during the Subprime crisis /or in&estment grade bonds, go!d and
the stock market are i!!ustrated in 2igure ''0 E&en though go!d had the higher Sharpe ratio during
this crisis, the &o!ati!it. in returns on in&estment grade bonds ere sti!! !oer than /or go!d0
This Case study supports the findings in 1ypothesis #, and highlights the importance of correlation changes on
investment management. 4nvestment grade bonds provided the best diversification during the -otcom crisis, and also
performed better than the stock market during the Subprime crisis. 7old provided the best diversification benefits
during the Subprime crisis, and it can be concluded that a strategy that rebalances on a yearly basis on the best
performance in the previous year is not an appropriate strategy from a diversification standpoint.

28

?+7 /o&'stness test res'lts
5s this stud. in&estigates the time#&ar.ing corre!ation beteen the stock market and the
bondNcommodities markets to assess the bene/its o/ cross#asset c!ass di&ersi/ication, the pro-. /or
the stock market as a!tered /rom the S;6 B,, to the Casda1 composite inde- and the 7S$I#US
In&estab!e inde-, to test the robustness o/ the resu!ts presented in Sections *02 and *030
Tab!e '' shos the 7S$I#US In&estab!e inde-As corre!ation ith the other asset c!asses at
the onset o/ a crisis, and it is shon that high .ie!d bonds sho a stronger, more signi/icant increase
in corre!ation during crises0 The in&estment grade bonds sho a stronger negati&e change in
corre!ation ith the period /o!!oing crises, and a signi/icant negati&e change during crises0 Thus the
use o/ the 7S$I#US In&estab!e inde- amp!i/ies the resu!ts /rom the bond markets0 This is hoe&er
not the case /or commodities, here oi! is not at a!! signi/icant, and go!d shos a !ess signi/icant
decrease in corre!ation during crises than ith the S;6 B,,, signi/icant at the 2' T !e&e!0 5na!.sing
the crises in more detai! as in Tab!e '3, the resu!ts shos a genera! support /or the ear!ier /indings0
Using the Casda1 composite inde- as the stock market pro-., Tab!e '2 a!so shos that high
.ie!d bonds increase in corre!ation ith the stock market during crises in genera!, but /or in&estment
grade bonds it on!. shos signi/icant decreases in corre!ation in the period a/ter crises0 8oe&er
hen stud.ing 2igure '@, there is a c!ear donards trend in corre!ation beteen in&estment grade
bonds and the stock market, e&en i/ the regression resu!ts are !ess signi/icant than ith other stock
market pro-ies0 Tab!e '4 shos the resu!ts /rom regression @0302, hich is in !ine ith pre&ious
resu!ts0 The graphica! i!!ustrations sho that the resu!ts /rom the robustness test are in !ine ith the
/indings /rom 8.pothesis 20
The robustness test o/ 8.pothesis 3 is presented in Tab!e 'B, herein it is possib!e to see
that the chosen market /actors ha&e the same e//ect hen using both the Casda1 composite inde-
and the 7S$I#US In&estab!e inde- as hen the S;6 B,, is used0 The same coe//icients are
signi/icant and the. ha&e simi!ar &a!ues0 This i!! strengthen the conc!usions in the ana!.sis as e!! as
the presented resu!ts0

29

:+ #nal!sis
In this Section, the resu!ts presented in Section * are ana!.sed and discussed0 The aim is to put the
/indings /rom this thesis into perspecti&e b. connecting the resu!ts ith pre&ious !iterature, and to
discuss the imp!ications /or in&estment management, as e!! as suggesting areas /or /urther research0
5t /irst this stud. aimed to cha!!enge the assumption o/ the 76T that corre!ation is constant
o&er time0 This as pro&en to be rong b. the /irst tests here it as possib!e to see that
corre!ations &ar. distinct!. o&er timeR &o!ati!it. can be obser&ed both graphica!!. and /rom the
regression resu!ts0 This supports the /indings o/ $oaker G2,,@H, and as corre!ation does &ar. o&er
time, this brings both opportunities and signi/icant risks to in&estors0 I/ corre!ation beteen asset
c!asses ere constant, it ou!d be possib!e to ho!d an optima! risk. port/o!io0 It pro&es that it can be
pro/itab!e to di&ersi/. and it cou!d be crucia! in times o/ crisis, but the 1uestion remains as to hoS
It as shon ith statistica! signi/icance that in&estment grade bonds ha&e pro&ided good
di&ersi/ication bene/its in times o/ crises, as corre!ation beteen the stock market and in&estment
grade bonds tends to decrease during crises, as pro&en b. the regression resu!ts in Tab!e 3 and
2igures @ and )0 This indicates that there is a E/!ight#to#1ua!it.F e//ect as described in the /indings o/
:aur and Luce. G2,',H0 This is the nature o/ in&estment grade bondsD the. pro&ide a sma!!er
predictab!e return e&er. .ear compared to stocks and the. are sub>ect to di//erent risks Gsee 2igures
', and ''H0 It as a!so shon ith statistica! signi/icance that corre!ation kept decreasing in the
period a/ter the crisisR this cou!d re/!ect that as con/idence returns to the /inancia! markets, there is a
re&ersed /!ight#to#1ua!it. e//ect, !eading to a se!!#o// in the sa/er bond markets, and a return to riskier
assets0
3o!d shos a decrease in corre!ation ith the stock market during the Subprime and
So&ereign 9ebt crises, indicating that go!d is sti!! considered a sa/e in&estment hen the /inancia!
markets are unstab!e0 :O.OkPahin et a! G2,,)H conc!uded that di&ersi/ication bene/its /rom
commodities eroded during the Subprime crisis, hoe&er the. did not stud. the indi&idua!
commodities, but instead a broad commodit. inde-0 It might e!! be that go!d is a good
di&ersi/ication in times o/ se&ere /inancia! crises, but commodities in genera! are not0
It is conc!uded that the high .ie!d bond market pro&ides a eak a!ternati&e /or
di&ersi/ication, as it tends to increase its corre!ation ith the stock market in times o/ crises,
particu!ar!. seen /or the Subprime and So&ereign debt crises, hich is !ine ith $oaker G2,,@H and
Rei!!. and "right G2,,'H0 8oe&er it can be seen in the case stud. that high .ie!d bonds pro&ide a
good a!ternati&e /or e1uit. in&estors, as it has outper/ormed the stock market in terms o/ higher
30

Sharpe ratios during the chosen time span0 8oe&er it is important to take transaction costs and
market access into account hen it comes to the high .ie!d bond market0 5ccess to the market can
be di//icu!t, but it has been more accessib!e due to a number o/ ET2s in recent .ears0 8oe&er this
is something that /urther studies needs to e-amine0
The ne-t part o/ the stud. in&estigated i/ changes in an. o/ the market /actors !i1uidit.
andNor &o!ati!it. had an. e-p!anator. e//ects on the corre!ation beteen the stock market and the
in&estment grade bonds, and the corre!ation beteen the stock market and go!d0 This is interesting
as the. re/!ect the c!imate o/ the /inancia! markets and might pro&ide an indication /or in&estors
hen it is time to reba!ance their port/o!ios0 9uring the 9otcom crisis the !i1uidit. premium
a//ected the corre!ation beteen the stock# and in&estment grade bond market negati&e!., hich
supports the E/!ight#to#sa/et.F e//ect, hoe&er this e//ect as s!ight!. re&ersed during the Subprime
crisis, as it became s!ight!. positi&e0 5s pre&ious!. discussed, this shou!d be due to the di//erent
nature o/ the Subprime crisis as compared to the 9otcom crisis0 The change in &o!ati!it. !e&e!s had
!itt!e impact during the 9otcom crisisR hoe&er it is the dominant /actor during the Subprime crisis,
here &o!ati!it. reached unprecedented !e&e!s0 This negati&e!. a//ects both assetsA corre!ations ith
the stock market0 The negati&e asset corre!ations indicates a /!ight to sa/et. since the return on the
chosen assets sta. positi&e due to higher demand, hoe&er the e//ect appears to come /rom
&o!ati!it., and not as much /rom !i1uidit.0
In an attempt to 1uanti/. the actua! bene/its o/ di&ersi/ication o&er the past 2B .ears, a case
stud. as conducted that compared the Sharpe ratio o/ an a!!#e1uit. in&estor ith the Sharpe ratio
/or a set o/ di&erse acti&e I$onstant#7i-A port/o!ios, passi&e port/o!ios and an acti&e port/o!io that
reba!ances e&er. .ear according to pre&ious .earAs optima! port/o!io0 The choice o/ the Sharpe ratio
as based on its sound theoretica! /rameork, !inking returns to risk e//ecti&e!. determined b. the
assetsA corre!ation, its common usage in the industr. and as it as used b. :!it? and K!iet G2,,)H,
hose resu!ts ere ke. in moti&ating our research0
The price /or an a!!#e1uit. in&estor to ignore di&ersi/ication has been high, as the Sharpe
ratio /or that port/o!io is signi/icant!. !oer on a&erage than an. di&ersi/ied port/o!io or an a!!#bond
port/o!io0 This stud. shos that the highest a&erage Sharpe ratios occurred /or the bond port/o!ios,
and it con/irms the /inding that in&estment grade bonds pro&ide high di&ersi/ication bene/its, as it is
the optima! port/o!io during the 9otcom crisis, and one o/ the best port/o!ios during the Subprime
crisis0 5nother interesting /inding on in&estment grade bonds is that the. per/ormed orst in the
period before crisesD this cou!d imp!. that the bond market is an indicator that the stock market is
31

about to tumb!e, hoe&er this is an area this stud. does not address and ma. indeed be due to
se&era! /actors0 %ne possib!e e-p!anation is that interest !e&e!s tend to be higher be/ore crises in
order to coo! don the econom., but this is an area hich e strong!. recommend /urther research0
The high .ie!d bond port/o!io as the best per/ormer on a&erage, but it a!so had the highest
&ariabi!it. and its strong corre!ation ith the stock market !ead to its orst per/ormance occurring
during crises periodsD thus it is not a good a!ternati&e /or di&ersi/ication, but gi&en the on a&erage
high Sharpe ratios it remains an interesting in&estment a!ternati&e0
3o!d pro&ed to be the best di&ersi/ication &ehic!e during the Subprime crisis, ith a Sharpe
ratio /ar e-ceeding its a&erage o&er the 2B#.ear period0 %n a&erage, the per/ormance o/ the
commodities is !oest, main!. due to high standard de&iations in their returns0 The bene/its /rom
di&ersi/.ing into go!d during the Subprime crisis cou!d be due to the nature o/ the crisis as suchR it
as not on!. a stock market crash, the entire /inancia! s.stem as threatened0 5s the /inancia!
s.stem is threatened, this is bound to a//ect the bond market, but not necessari!. go!d Gor other
ph.sica! assetsH0 E&en though commodities on their on do not ha&e attracti&e Sharpe ratios, a risk#
a&erse in&estor ou!d sti!! ha&e bene/itted /rom di&ersi/.ing into commodities, as the &ariabi!it. is
the !oest in the port/o!ios that as the most di&ersi/ied across a!! the asset c!asses0
6erhaps surprising!., the o&era!! per/ormance o/ the e1ua!!. di&ersi/ied port/o!io did not
match those o/ the bond port/o!ios, e&en though &ariabi!it. as !ess0 The acti&e!. reba!anced
port/o!io based on !ast .earAs optima! port/o!io per/ormed rather poor!. compared to the others,
and hen taking transaction costs into account, this ou!d ha&e been a cost!. strateg., not pro&iding
the returns one might ha&e e-pected /o!!oing the reasoning behind momentum strategies,
especia!!. draing /rom :!it? and K!iet G2,,)H, ho /ound a signi/icant momentum e//ect in cross#
asset c!ass in&estments0 8oe&er, the. used actua! returns to rank the highest .ie!ding assets,
hether this port/o!io se!ected the assets that created the optima! Sharpe ratio, and there is
apparent!. a big discrepanc. beteen these to methods0
2igure ', and 2igure '' cha!!enges the notion o/ go!d as a sa/e di&ersi/ication a!ternati&e
during times o/ crisis0 It shos that e&en i/ go!d ere to ha&e positi&e returns, the &o!ati!it. ou!d be
1uite high resu!ting in a !oer Sharpe ratio on a&erage compared to in&estment grade bonds0 5n
in&estor there/ore has an a!ternati&e in times o/ crisis, to choose an abso!ute return that is more
/re1uent!. the case ith in&estment grade bonds or choose specu!ation on higher returns ith go!d0
In&estment grade bonds o/ten resu!ts in higher Sharpe ratios, but it a!! comes don to the in&estorAs
risk a&ersion0
32

9+ "oncl'sion
This thesis pro&ides e&idence that corre!ation &aries distinct!. o&er time, and that di//erent asset
c!asses are a//ected di//erent!. o&er the crisis c.c!e0 In&estment grade bonds decreases in corre!ation
ith the stock market during periods o/ crisis in genera!, and the case stud. pro&es that these
corre!ation changes can be direct!. trans!ated into di&ersi/ication bene/its, gi&en the high re!ati&e
Sharpe ratios pro&ided b. an in&estment grade bond port/o!io during a crisis0 3o!d is shon to
decrease its corre!ation ith the stock market under se&ere /inancia! crises such as the Subprime
crisis, and conse1uent!. it pro&ided the best di&ersi/ication bene/its in terms o/ Sharpe ratios during
that crisis0 It is hoe&er conc!uded that the &o!ati!it. in returns /rom go!d is much higher than that
o/ in&estment grade bonds during crises0 2urthermore it supports pre&ious research regarding the
corre!ation increases beteen the stock market and high .ie!d bonds during crisesR this is supported
b. the case stud. here the high .ie!d bond# and stock port/o!ios ere the orst per/orming
port/o!ios during crises0 "TI#$rude %i! as not a//ected b. crises ith an. statistica! signi/icance0
The di&ersi/ication bene/its that arise /rom in&estment grade bonds and go!d /rom the
changes in corre!ation are partia!!. due to a E/!ight#to#sa/et.F e//ect0 It is a!so shon that a e!!#
di&ersi/ied port/o!io has not bene/itted /rom higher Sharpe ratios than those .ie!ded b. the bond
markets, but it has had !oer &ariabi!it. according to the same stud., hich is !ine ith the 76T0
9+1 S'ggestions for f'rther research
9uring the case stud. it as /ound that the e-cessi&e return on the in&estment grade bond port/o!io
as negati&e in the times immediate!. preceding crisis periods, hich might imp!. that negati&e
in&estment grade bond returns indicate a /uture stock market crash, or /inancia! turmoi!0 This e//ect
is something that as not considered at the commencement o/ this thesis, thus no /urther emphasis
as put on this particu!ar area0 2urthermore, it ou!d be bene/icia! /or the in&estment# and risk
management pro/essions to use economic mode!s ithout assuming constant corre!ation, a!!oing
mode!!ing risk and returns in a a. that re/!ects rea!it.0 5 rea!it. in hich corre!ations are time#
&ar.ing0


33

10+ Fig'res and Ta&les














0
2
0
0
4
0
0
6
0
0
8
0
0
1
0
0
0
I
n
d
e
x
e
d

l
e
v
e
l
January 1987 January 1995 January 2004 January 2013
Time
Investment grade High yield
S&P 500 Gold
WTI-Crude Oil
Asset returns 1986 - 2013
Fig're 1
34







-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 1995 January 1986 January 2004 January 2013
Time
Correlation IG Correlation HY
24 months moving window
1986 - 2013
Correlation between stock and bond markets
-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 1986 January 1995 January 2004 January 2013
Time
Correlation IG Correlation HY
12 months rolling window
1986 - 2013
Correlation between stock and bond markets
Fig're 2
Fig're 3
35







-
.
5
0
.
5
C
o
r
r
e
l
a
t
i
o
n
January 1986 January 1995 January 2004 January 2013
Time
Correlation Gold Correlation Oil
24 months moving window
1986 - 2013
Correlation between stock and commodities markets
-
1
-
.
5
0
.
5
C
o
r
r
e
l
a
t
i
o
n
January 1986 January 1995 January 2004 January 2013
Time
Correlation Gold Correlation Oil
12 months rolling window
1986 - 2013
Correlation between stock and commodities markets
Fig're 6
Fig're 7
36







-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 1998 January 2000 January 2002 January 2004
Time
Correlation IG Correlation HY
12 months moving window
Dotcom crisis
Correlation between stock and bond markets
-
1
-
.
5
0
.
5
C
o
r
r
e
l
a
t
i
o
n
January 1998 January 2000 January 2002 January 2004
Time
Correlation Gold Correlation Oil
12 months moving window
Dotcom crisis
Correlation between stock and commodities markets
Fig're ;
Fig're ?
37






-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 2005 January 2007 January 2009 January 2011
Time
Correlation IG Correlation HY
12 months moving window
Subprime crisis
Correlation between stock and bond markets
-
.
5
0
.
5
C
o
r
r
e
l
a
t
i
o
n
January 2005 January 2007 January 2009 January 2011
Time
Correlation Gold Correlation Oil
12 months moving window
Subprime crisis
Correlation between stock and commodities markets
Fig're :
Fig're 9
38



$escripti%e statistics


$orre!ation
I3
$orre!ation
8V
$orre!ation
3o!d
$orre!ation
%i!
7a- ,0)3,' ,0(24@ ,04('3 ,0B)B)
7in #,04*3) #,02,(* #,0)'3* #,0*)B@
7ean ,02',3 ,0B@@@ #,0,B'3 #,0,*22
Std0 9e&0 ,033'3 ,0243' ,02))3 ,03,'2

Ta&le 2 < (/egression ;+2+1)

"orrelation coefficients o%er time( @earl! &asis

$orre!ation I3 $orre!ation 8V $orre!ation 3o!d $orre!ation %i!
19:? ,0,@B' ,0*,B)[ ,0''@3[ ,04',)[
19:: ,0,4(@ ,0@,,,[ ,0,')2[ #,0'2)'
19:9 ,0B3B@[ ,044,'[ ,0,44*[ ,0223,[
1990 ,0@,@@[ ,0@'4*[ ,0'4@3[ #,04@@B[
1991 ,0@*,([ ,0BB@3[ #,0434( #,0B('@[
1992 ,0@,(@[ #,0,(3)[ ,02@B4[ #,032*'[
1993 ,0'4** ,02*,*[ #,02,** #,02'2@
1996 ,0*3@'[ ,0@),([ ,022)'[ #,0,'3*
1997 ,0B3@,[ ,0@**B[ ,0,*'4[ ,03@*,[
199; ,02*B ,0B2(,[ ,0,'2([ ,0,*(2[
199? ,0@*(3[ ,0*2@ #,0,*)@[ ,023)3[
199: ,033)) ,0@@(B[ #,0,,4'[ #,02'2'
1999 ,03(2) ,0B222[ ,0'(2([ #,0'3B*
2000 ,03',( ,0'423[ ,032'4[ ,0,@@3[
2001 ,0,B3B[ ,03((4[ ,0,B,B[ #,04@(3[
2002 #,03*@*[ ,0@232[ #,02,4*[ #,03@4([
2003 #,02'4*[ ,0443)[ #,02)*3 #,04@),[
2006 ,0,22([ ,0333B[ #,0,'('[ #,023'3
2007 #,0'3(2[ ,0B44@[ ,02*,2[ ,0'')'[
200; ,0,3@4 ,0@''3[ #,03@'4 #,03,))[
200? #,0,442[ ,0@3)'[ #,0'@43 #,02244
200: ,0'2B' ,0)*B) #,024( #,0'B''
2009 ,0B*3B[ ,0*4@B #,0'2(4[ ,04@)([
2010 ,0'42B ,0@@'4[ #,0,',)[ ,0'*3@[
2011 #,0,B'([ ,0)')) #,0'B@ ,0',4@[
[ Signi/icant at the B T !e&e!

Ta&le 1
39

Ta&le 3 < (/egression ;+3+1)

"orrelation *ith the onset of crises periods
6re $risis $risis 6ost $risis Wcons
"orrelation ,A
$oe//icient #,032BB #,03@') #,0443' ,04@@B
t#&a!ue G#3034H G#304)H G#40,,H #*04@
$on/idence !e&e! ,T ,T ,T ,T
C#" std0err ,0,(*B ,0',4' ,0'',* ,0,@2@
"orrelation 8@
$oe//icient ,0,B*B ,0'32) ,0,3)B ,0B,)*
t#&a!ue #,0( #'03( #,04* #(0'@
$on/idence !e&e! 3*T '*T @4T ,T
C#" std0err ,0,@3@ ,0,(B4 ,0,)'3 ,0,BB@
"orrelation Aold
$oe//icient #,0,'3 #,0'4B' #,0',42 ,0,,(3
t#&a!ue G#,0''H G#'043H G#'022H #,0'*
$on/idence !e&e! ('T 'BT 22T )@T
C#" std0err ,0''B) ,0','4 ,0,)BB ,0,B3'
"orrelation -il

$oe//icient #,0,(34 #,0,*(B #,0,,'* #,0,B(3
t#&a!ue G#'0,,H G#,0*BH G#,0,'H G#,0)'H
$on/idence !e&e! 32T 4BT ((T 42T
C#" std0err ,0,(3' ,0',@ ,0'B,) ,0,*3'

40

Ta&le 6 < (/egression ;+3+2)

"orrelation d'ring the specified crises and the periods &eforeBafter
6re 9otcom 9otcom 6ost 9otcom 6re Subprime Subprime 6ost Subprime So&ereign Wcons
"orrelation ,A
$oe//icient #,0''3( #,04@'' #,0@,33 #,0B,'( #,02)(4 #,02@B2 #,02@B) ,04@*(
t#&a!ue G#'03BH G#304,H G#@04@H G#B0@*H G#'0@(H G#'0*'H G#20@(H G#*0BBH
$on/idence !e&e! ')T ,T ,T ,T (T (T 'T ,T
C#" std0err ,0,)42 ,0'3BB ,0,(34 ,0,))B ,0'*'B ,0'BB ,0,()* ,0,@2
"orrelation 8@
$oe//icient ,0,B) #,0'2@@ #,0,(2' ,0,*'* ,03,@@ ,02,3B ,033)@ ,0B,*)
t#&a!ue G,0*BH G#'02,H G#'02)H G'0'2H GB0,(H G3033H GB0@2H G(02BH
$on/idence !e&e! 4BT 23T 2,T 2@T ,T ,T ,T ,T
C#" std0err ,0,**3 ,0',B2 ,0,*2' ,0,@3) ,0,@,3 ,0,@' ,0,@,2 ,0,B4(
"orrelation Aold
$oe//icient ,0',B4 ,0,44 #,0'@*2 #,0'3(2 #,0'2,3 #,0,4*3 #,04(B* ,0,''3
t#&a!ue G#'042H G,03(H G#'0(H G#,0)'H G#'043H G#,04BH G#4032H G,022H
$on/idence !e&e! '@T *,T @T 42T '@T @@T ,T )2T
C#" std0err ,0,*4B ,0''2' ,0,)*) ,0'*2@ ,0,)43 ,0',@' ,0''4@ ,0,B,2
"orrelation -il
$oe//icient #,0,)B@ #,02'B3 #,02(2' #,0,*,B ,0,2** ,0333B ,0,,4B #,0,@'B
t#&a!ue G#'0,,H G#'0@(H G#20'(H G#,0B)H G,0')H G30')H G,0,BH G#,0)@H
$on/idence !e&e! 32T (T 3T B@T )@T ,T (@T 3(T
C#" std0err ,0,)B) ,0'2*4 ,0'332 ,0'2' ,0'B2' ,0',4) ,0,(4 ,0,*'@




41

Ta&le 7 < (/egression ;+6+1)

Effect of changes in market factors d'ring the specific crises and the periods &eforeBafter
6re 9otcom 9otcom 6ost 9otcom 6re Subprime Subprime 6ost Subprime
"orrelation ,A

"hange in Ci3'idit! le%el -0+2229 -0+0?1: -0+00?6 -0+:3?3 -0+067; -1+627?
t#&a!ue #G'0@)H #G'0((H #G,03(H #G,0(2H #G20'3H #G40,3H
$on/idence !e&e! ',T @T *,T 3*T BT ,T
C#" std0err ,0'33' ,0,3@' ,0,')( ,0('33 ,0,2'4 ,03B34
"hange in olatilit! le%el -0+2: -2+379 6+109 1+619 -3+932 7+037
t#&a!ue #G'0(2H #G,0)2H #G20'BH #G'02BH #G40B@H #G204(H
$on/idence !e&e! @T 42T 4T 22T ,T 2T
C#" std0err ,0'4@ 20))B '0('4 '0'3* ,0)@2 20,24
D"onst -0+0:2 0+009 0+10? -0+032 0+292 -0+007
t#&a!ue #G,0@*H #G,0,)H #G'0B*H #G,04@H #G20,BH #G,0,4H
$on/idence !e&e! B,T (4T '3T @BT BT (*T
C#" std0err ,0'23 ,0''4 ,0,@) ,0,@( ,0'43 ,0''3
"orrelation Aold
"hange in Ci3'idit! le%el 0+020: -0+0:09 0+016: 7+617: -0+03;6 1+22?7
t#&a!ue G,0'*H #G20('H G,0@2H G20(@H #G402H G20B@H
$on/idence !e&e! )*T 'T B4T 'T ,T 2T
C#" std0err ,0'23' ,0,2** ,0,24' '0)2( ,0,,)* ,04),3
"hange in olatilit! le%el -2+6:29 -3+7?66 7+036; -0+?021 -1+:;;2 -2+26;;
t#&a!ue #G20*(H #G'0B@H G204(H #G,02*H #G204'H #G'0(3H
$on/idence !e&e! 'T '3T 2T *(T 3T *T
C#" std0err ,0))() 202('' 20,244 20@334 ,0**4( '0'@@@
D"onst 0+129 0+0;;1 -0+007 -0+23;3 -0+069; -0+01;2
t#&a!ue G30BBH G,0*@H #G,0,4H #G'0B(H #G'0'2H #G,023H
$on/idence !e&e! ,T 4@T (*T '2T 2*T )2T
C#" std0err ,0,3@3 ,0,)*3 ,0''32 ,0'4)B ,0,44' ,0,@(3
42

From this page follo*s the "ase st'd! res'lts
Ta&le ;










$escripti%e statistics Sharpe ratios

%ptima!
' .ear
reba!ance
9i&erse and
passi&e Stock E1ua! bond I3 8V
Stock and
:ond 3o!d %i!
5&erage
optima!
5&erage 30'@ ,0)@ ,0)B ,0** '03' '0,4 '0B, '0,* ,0,4 ,02* '023
(,Xs 5&erage 30B4 ,0(, ,0*3 '0B3 '0@3 ,0(4 20,@ '0*3 #,0)4 #,0,* '02@
,,Xs 5&erage 30'B '023 '0,@ ,0'* '02* '024 '032 ,0@2 ,0(' ,0B' '04'
7a- *04B 404, 30*B @03B B0@, 303B @0@2 @0), 20*, 204( 404,
7in ,0'' #20'* #202) #'0(B #20,B #202* #20'* #'0@3 #202( #'0** #'033
Std09e&0 20,* '0@3 '03@ '0B@ 20', '04* 203( '0*) '02* '02' '0B2
Cr o/ negati&e , ) * @ ) @ ', * '3 '' )
Cr abo&e '0, 2' '3 '2 '2 '2 '3 '3 '3 * * 'B
43

Ta&le ?

Sharpe ratio of the different portfolios(

@ear %ptima!
' .ear
reba!ance
9i&erse and
passi&e
Stock E1ua! bond I3 8V
Stock and
:ond
3o!d %i!
5&erage
optima!
19:: '0)4 #'04' #,0' '022 ,0)( ,0') '0)4 '0') #'04' #,0' ,0'
19:9 ,0(* #20'* ,0') ,04' #,0(2 ,04) #20'* ,0'' #,0)4 ,0( #,02@
1990 ,0BB ,04' ,0,( ,0,4 #,042 ,0B2 #,0)3 #,0,( #,0*@ ,034 #,0,*
1991 *04B '0'( ,03@ '0*' B0@ 20B' 40@ 20'B #'0B4 #'02' 303@
1992 40,2 302@ '02' '0,2 302( 203@ 30** 2022 #'0,( #,0'' 204(
1993 @0@3 30@* ,0*) '0B' 404( 2043 @0@2 20B* ,0(* #'0** 2
1996 ,0)* #'03' #,0,' #,032 #'044 #'04' #'03 #,0* #,0*( ,0)* #,0B'
1997 @0)B ,02* 20@B @03B 4043 303B 40)3 @0) #,0(2 ,02* 302*
199; 2043 '042 '04* '0)2 ,03( #,042 '0(3 '0@2 #'044 '0' '0'(
199? 2042 '043 #,0) '042 '0( '034 2042 '0B* #202( #'0@* #,0'
199: '0@@ #,02@ #,024 '033 ,0'4 ,0() #,02@ '0'( #,03* #' #,032
1999 20B2 #'0' '0*( ,04' #20,B #202* #'02 , #,023 204* '03'
2000 '0@2 #,0'3 #,03@ #,04* ,0'@ '0@2 #,04( #,03B #'0,4 #,0,3 #,02'
2001 '022 '022 #202) #'0' #,0,4 '022 #,0B #,0(( #,0'3 #'02@ #'02(
2002 30* '0@B '034 #'02@ ,04( '0@B #,0,( #,0(4 '0*4 '0*@ '03@
2003 B0B* '0BB 204 '0)4 20(( '0'3 404@ 30) '02' ,0' 30,2
2006 20,( '034 '02) ,04' '0B ,0) 20,B ' ,02( ' '0B'
2007 20(B ,04( 203( ,0*2 #,0,* #,0B2 ,02( ,0B3 '0'2 '034 202@
200; 30B' ,0)' ,0*' '03* '02@ #,0,B 20(3 '04( ,0(3 #,0') ,0(@
200? 203 #,0BB '0(' #,0** #,0B4 ,04 #,0)B #,0*( '0() 20,2 '0@
200: ,0'' #,0B( #'042 #'0(B #,0() #,0*2 #'0,' #'0@3 ,0'' #'0,( #'033
2009 B0(2 '02@ 30*B '04) 40,( 3034 4 2042 '02@ 204( 404
2010 B0,4 404 20') '0,@ 20B '0( 2024 '04@ 20* ,0BB 20*'
2011 20@( '0B2 ,0)* ,0'2 '0,( 20,) ,0B3 ,042 ,03) ,02* '03B
2012 40'( 30,4 '0,* ,0*B 40,B 3022 30B) '0@' '024 #,032 '0()

44

Ta&le :

"omposition of the optimal portfolio
@ear Stocks I3 8V 3o!d %i!
19:: ,T ,T ',,T ,T ,T
19:9 ,T @'T ,T ,T 3(T
1990 '3T *3T 2T 4T (T
1991 ,T 3,T B*T 3T ',T
1992 ''T ,T )2T ,T *T
1993 ,T ,T ',,T ,T ,T
1996 ,T ,T ,T ,T ',,T
1997 B,T 2)T '4T )T ,T
199; ',T ,T )3T ,T *T
199? ,T ,T ',,T ,T ,T
199: 2,T (2T ,T ,T ,T
1999 3*T ,T ,T ,T @3T
2000 ,T ',,T ,T ,T ,T
2001 ,T ',,T ,T ,T ,T
2002 4T *,T ,T 2'T 4T
2003 4,T 'T 43T @T ',T
2006 ,T ,T ()T ,T 2T
2007 2,T B,T ,T '(T ''T
200; ,T ,T (4T @T ,T
200? ,T ,T ,T @BT 3BT
200: ,T ,T ,T ',,T ,T
2009 ,T B3T 24T 23T ,T
2010 2T @(T ,T 2@T 4T
2011 )T ),T ,T '2T ,T
2012 ,T 43T B4T ,T 3T
5&erage (T 34T 34T '2T '2T
[ The a&erage port/o!io eights act as the basis in the 5&erage optima! port/o!io Y$7Z






45

Ta&le 9


Sharpe ratios d'ring the onset of crises
6re $risis $risis 6ost $risis
%ptima! port/o!io 20B 202@ 40@@
' .ear reba!ance #,02) ,0)) 20'4
9i&erse and passi&e '0,4 ,0'@ 204
Stock ,0B( #,0@* '02
E1ua! eight bond #,03 ,0@ 20**
I3 #,024 '03B '0*(
8V ,0'B ,0'* 30'(
Stock and :ond ,04* #,03) 20'*
3o!d ,0B) ,0@' '03*
%i! ,0)3 ,0'( '0,4
5&erage optima! ,0)) ,04( 20('





46

Ta&le 10

#%erage Sharpe ratios conditioned on the specified crises periods

6re 9otcom 9otcom 6ost 9otcom 6re Subprime Subprime 6ost Subprime So&ereign
%ptima! 20,( 20') 30)3 3023 '02 B04) 3044
' .ear reba!ance #,0@) ,0(' '04B ,0@B #,0B* 20)3 202)
9i&erse and passi&e ,0*) #,043 '0)4 '0BB ,02B 20(@ ,0(*
Stock ,0)* #,0(4 '0'3 '0,B #'03@ '02* ,044
E1ua! bond #,0(@ ,02 202B ,0B( #,0*@ 302( 20B*
I3 #,0@B '0B ,0(@ #,02( #,0'@ 20@2 20@B
8V #,0*3 #,03@ 302@ '0@' #,0(3 30'2 20,B
Stock and :ond ,0@ #,0*@ 204 '0,' #'02' '0(4 '0,'
3o!d #,03 ,0'( ,0*B '0,3 '0,B '0() ,0)'
%i! ,0*3 ,0'@ ,0BB ,0B) ,04@ '0B2 #,0,3
5&erage optima! ,04( #,0,B 202* '0@' ,0'3 30B@ '0@*
5&erage ,02 ,024 '0)) '0'B #,0'* 20*) '0@2
5&erage e-c!0 %ptima! ,0,' ,0,4 '0@) ,0(4 #,03' 20B' '044









47

Fig're 10

Fig're 11

-
.
2
-
.
1
0
.
1
.
2
M
o
n
t
h
l
y

r
e
t
u
r
n
July 2007 January 2008 July 2008 January 2009 July 2009
Time
Investment grade Stock market
Gold
Monthly returns during the Subprime crisis
-
.
1
-
.
0
5
0
.
0
5
.
1
M
o
n
t
h
l
y

r
e
t
u
r
n
January 2000 July 2000 January 2001 July 2001 January 2002 July 2002
Time
Investment grade Stock market
Gold
Monthly returns during the Dotcom crisis
48


From this page follo*s the /o&'stness test res'lts
Ta&le 11









"orrelation changes d'ring the onset of crises(
4S", ES ,n%esta&le inde1 'sed as a pro1! for the stock market
6re $risis $risis 6ost $risis Wcons
"orrelation ,A

$oe//icient #,02@** #,02)@' #,03)33 ,04,)'
t#&a!ue G#2032H G#203)H G#20(BH G40@3H
$on/idence !e&e! 2T 2T ,T ,T
C#" std0err ,0''BB ,0'2,2 ,0'3,, ,0,))'
"orrelation 8@

$oe//icient ,0,4*) ,0'BB) ,0,2)2 ,0B3@3
t#&a!ue G,0*'H G'0)BH G,032H G)0B(H
$on/idence !e&e! 4*T @T *BT ,T
C#" std0err ,0,@@( ,0,)4 ,0,)*( ,0,@24
"orrelation Aold

$oe//icient #,0,,@* #,0'2B4 #,0,))2 #,0,'3@
t#&a!ue G#,0,@H G#'024H G#'0,'H G#,023H
$on/idence !e&e! (BT 2'T 3'T )2T
C#" std0err ,0''B) ,0',,) ,0,)*' ,0,@,3
"orrelation -il

$oe//icient #,0,))4 #,0,@32 ,0,,,4 #,0,@,B
t#&a!ue G#,0*3H G#,04(H G,0,,H G#,0B*H
$on/idence !e&e! 4@T @2T ',,T B*T
C#" std0err ,0'2,4 ,0'2)2 ,0'*42 ,0',@)
49

Ta&le 12

"orrelation changes d'ring the onset of crises(
=asda3 "omposite inde1 'sed as a pro1! for the stock market
6re $risis $risis 6ost $risis Wcons
"orrelation ,A
$oe//icient #,0,@(@ #,0''3B #,034@4 ,02B(2
t#&a!ue G#,0B(H G#'0,)H G#20(2H G#30B'H
$on/idence !e&e! B@T 2)T ,T ,T
C#" std0err ,0'') ,0',4@ ,0'')B ,0,*3(
"orrelation 8@
$oe//icient ,0,*)3 ,02'@B ,0,2B) ,04@*3
t#&a!ue G'023H G30''H G,024H G)02'H
$on/idence !e&e! 22T ,T )'T ,T
C#" std0err ,0,@3( ,0,@(@ ,0',** ,0,B@(
"orrelation Aold

$oe//icient ,0,,B4 #,0',)2 ,0,2,B #,0,3)4
t#&a!ue G,0,BH G#'02@H G,02*H G,0('H
$on/idence !e&e! (@T 2'T *(T 3@T
C#" std0err ,0',,* ,0,)B@ ,0,*@) ,0,42'
"orrelation -il
$oe//icient #,0,**3 ,0,42' ,0'B2* #,0'*BB
t#&a!ue G#,0*(H G,03)H G,0()H G#202*H
$on/idence !e&e! 43T *,T 33T 2T
C#" std0err ,0,()' ,0'',B ,0'B@4 ,0,**2









50

Ta&le 13


"orrelation d'ring crises( 4S", ES ,n%esta&le as pro1! for the stock market

6re 9otcom 9otcom 6ost 9otcom 6re Subprime Subprime 6ost Subprime So&ereign Wcons
"orrelation ,A
$oe//icient #,0,4(2 #,03B3( #,0B3@' #,04@3* #,02244 #,02'*) #,02B*) ,04,)'
t#&a!ue G#,04)H G#20'H G#40*(H G#40B@H G#'02'H G#'02*H G#20,@H G40B(H
$on/idence !e&e! @3T 4T ,T ,T 23T 2'T 4T ,T
C#" std0err ,0',2* ,0'@)3 ,0''') ,0','@ ,0')BB ,0'*22 ,0'24( ,0,))(
"orrelation 8@
$oe//icient ,0,434 #,0,B32 #,0''*4 ,0,B'@ ,02('* ,0')B( ,03,2' ,0B3@3
t#&a!ue G,0B)H G,0@3H G'03*H G,0*2H G403BH G20*(H G404'H G)0B2H
$on/idence !e&e! B*T B3T '*T 4*T ,T 'T ,T ,T
C#" std0err ,0,*B4 ,0,)B' ,0,)B@ ,0,*'3 ,0,@*' ,0,@@* ,0,@)B ,0,@2(
"orrelation Aold
$oe//icient ,0'2'@ ,0,@B' #,0'B*4 #,0'2'* #,0,(B2 #,0,'33 #,042@( #,0,'3@
t#&a!ue G'0B(H G,0@2H G#'0*3H G#,0@(H G#'0,3H G#,0'2H G#303BH G#,022H
$on/idence !e&e! ''T B4T (T 4(T 3'T ('T ,T )2T
C#" std0err ,0*@@ ,0',B@ ,0,(' ,0'*B* ,0,(2) ,0''') ,0'2*3 ,0,@,)
"orrelation -il
$oe//icient #,0,),) #,0'*@) #,03,2) #,0,(B2 #,0,'3* ,032)) ,0'2(* #,0,@,B
t#&a!ue G#,0*,H G#'0'2H G#'0))H G#,0@4H G#,0,)H G204(H G,0''H G#,0B@H
$on/idence !e&e! 4(T 2@T @T B2T (4T 'T ('T B)T
C#" std0err ,0''@' ,0'B*2 ,0'@'2 ,0'4) ,0'*(* ,0'32 ,0'')2 ,0',**


51


Ta&le 16


"orrelation d'ring crises( =asda3 composite inde1 as pro1! for the stock market
6re 9otcom 9otcom 6ost 9otcom 6re Subprime Subprime 6ost Subprime So&ereign Wcons
"orrelation ,A
$oe//icient ,0'*(3 #,0'@4@ #,0B2'@ #,02(2( #,0,*B' #,0'B@B #,0,)33 ,02B(2
t#&a!ue G#'0*)H G#'0'2H G#@0',H G#30'2H G#,04)H G#'0,'H G#,0@2H G304)H
$on/idence !e&e! )T 2@T ,T ,T @3T 32T B4T ,T
C#" std0err ,0',,@ ,0'4@3 ,0,)BB ,0,(3( ,0'B4( ,0'BBB ,0'34* ,0,*44
"orrelation 8@
$oe//icient ,0'2'' ,0,(2' #,0')') ,0,3(( ,02@@@ ,02B,* ,033*2 ,04@*3
t#&a!ue G'0)'H G'03)H G#'0@)H G,0B@H G30@4H G30('H G404H G)0'@H
$on/idence !e&e! *T '*T (T B)T ,T ,T ,T ,T
C#" std0err ,0,@* ,0,@@( ,0',) ,0,*'B ,0,*33 ,0,@4' ,0,*@* ,0,B*3
"orrelation Aold
$oe//icient ,0,'4) ,0,*BB #,0,(@) #,0,,3' #,0,@B3 ,0'4*B #,04'3) #,0,3)4
t#&a!ue G,032H G'0B3H G#'03(H G#,0,2H G#,0*2H G'0*3H G#30@,H G#,0('H
$on/idence !e&e! *BT '3T '*T ((T 4*T (T ,T 3*T
C#" std0err ,0,4B( ,0,4(3 ,0,@(@ ,0'*(' ,0,(' ,0,)B3 ,0''B ,0,423
"orrelation -il
$oe//icient #,0,@'* #,0,*@3 #,0'42' #,0,('3 ,0'@2, ,04*2' ,0,*)' #,0'*BB
t#&a!ue G#,0*BH G#,04)H G#'0,3H G#,0@@H G,0(@H G30)4H G,0)*H G#202@H
$on/idence !e&e! 4@T @3T 3,T B'T 34T ,T 3(T 3T
C#" std0err ,0,)2* ,0'B** ,0'3*) ,0'3(3 ,0'@)B ,0'23 ,0,)(* ,0,***



52

Ta&le 17

Effect in crises of market parameters on correlation0 ro&'stness test

9otcom GS;6 B,,H 9otcom GCasda1H 9otcom G7S$IH Subprime GS;6 B,,H Subprime GCasda1H Subprime G7S$IH
"orrelation ,A

Ci3'idit! le%el -1+23:0 -1+27;1 -1+63?3 0+7110 0+2;7: 0+7120
t#&a!ue #G)0*2H #G*032H #G*0(3H G3023H G'0@,H G30')H
$on/idence !e&e! ,T ,T ,T ,T '3T ,T
C#" std0err ,0'42, ,0'*'* ,0')'3 ,0'B)3 ,0'@@2 ,0'@,(
"hange in olatilit! le%el 0+0;60 1+3?9: 0+3;:7 -1+;6:3 -2+;?03 1+?7?7
t#&a!ue G,0,4H G,0*BH G,02'H #G2023H #G303@H #G203BH
$on/idence !e&e! (*T 4@T )4T 4T ,T 3T
C#" std0err '04)) '0)332 '0**4 ,0*3( ,0*(4@ ,0*4(
D"onst 0+30?; 0+3::9 0+6011 0+0736 0+1;7? 0+0;11
t#&a!ue GB0)'H GB0*,H GB0)(H G,04(H G'04@H G,0B@H
$on/idence !e&e! ,T ,T ,T @3T '@T B)T
C#" std0err ,0,B3, ,0,@)2 ,0,@)' ,0',), ,0''3B ,0',(3
"orrelation Aold



Ci3'idit! le%el -1+010; -0+1:17 -0+:?;9 -0+1?70 0+00;7 -0+17?9
t#&a!ue #G@0'@H #G30,3H #G@03@H #G'0(4H G,0,(H #G'0*'H
$on/idence !e&e! ,T 'T ,T *T (3T ',T
C#" std0err ,0'@4, ,0,B(( ,0'3), ,0,(,, ,0,*B* ,0,(2'
"hange in olatilit! le%el -0+3969 -0+?9?; -0+?071 -2+29:0 -2+:?66 -2+60;6
t#&a!ue #G,023H #G,0B,H #G,04,H #G402@H #G@0,BH #G402(H
$on/idence !e&e! )2T @2T *,T ,T ,T ,T
C#" std0err '0@(B2 '0B)2' '0**(' ,0B3(3 ,04*4( ,0B@,(
D"onst 0+306; 0+0:?9 0+2?0: 0+00?; -0+031? 0+0070
t#&a!ue GB0)(H G30(@H G*042H G,0'@H #G,0*(H G,0''H
$on/idence !e&e! ,T ,T ,T ))T 44T (2T
C#" std0err ,0,B'* ,0,222 ,0,3@B ,0,4)4 ,0,4,3 ,0,4*4

53

Fig're 12

Fig're 13

-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 1998 January 2000 January 2002 January 2004
Time
Correlation IG Correlation HY
12 months moving window
MSCI US Investable index used as a proxy for the stock market
Stock and bond markets correlation: Dotcom crisis
-
1
-
.
5
0
.
5
C
o
r
r
e
l
a
t
i
o
n
January 1998 January 2000 January 2002 January 2004
Time
Correlation Gold Correlation Oil
12 months moving window
MSCI US Investable index as a proxy for the stock market
Stock and commodities markets correlation: Dotcom crisis
54

Fig're 16

Fig're 17

-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 2005 January 2007 January 2009 January 2011
Time
Correlation IG Correlation HY
12 months moving window
MSCI US Investable index used as a proxy for the stock market
Stock and bond markets correlation: Subprime crisis
-
.
5
0
.
5
C
o
r
r
e
l
a
t
i
o
n
January 2005 January 2007 January 2009 January 2011
Time
Correlation Gold Correlation Oil
12 months moving window
MSCI US Investable index used as a proxy for the stock market
Stock and commodities markets correlation: Subprime crisis
55

Fig're 1;

Fig're 1?

-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 1998 January 2000 January 2002 January 2004
Time
Correlation IG Correlation HY
12 months moving window
Nasdaq composite index used as a proxy for the stock market
Stock and bond markets correlation: Dotcom crisis
-
1
-
.
5
0
.
5
C
o
r
r
e
l
a
t
i
o
n
January 1998 January 2000 January 2002 January 2004
Time
Correlation Gold Correlation Oil
12 months moving window
Nasdaq composite index as a proxy for the stock market
Stock and commodities markets correlation: Dotcom crisis
56

Fig're 1:


Fig're 19

-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 2005 January 2007 January 2009 January 2011
Time
Correlation IG Correlation HY
12 months moving window
Nasdaq composite index used as a proxy for the stock market
Stock and bond markets correlation: Subprime crisis
-
1
-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 2005 January 2007 January 2009 January 2011
Time
Correlation Gold Correlation Oil
12 months moving window
Nasdaq composite index used as a proxy for the stock market
Stock and commodities markets correlation: Subprime crisis
57

/eferences
:aur, 9030 ; Luce., :070 2,',, \Is 3o!d a 8edge or a Sa/e 8a&enS 5n 5na!.sis o/ Stocks, :onds
and 3o!d\, 2inancial 8eview, &o!0 4B, no0 2, pp0 2'*#22(0
:erk, Q0 ; 9e7ar?o, 60 2,',, Corporate 2inance, 3!oba! Edition, 2 edition0 edn, 6earson, Ce Vork0
:!it?, 90$0 ; Kan K!iet, 60 2,,), \3!oba! Tactica! $ross#5sset 5!!ocationD 5pp!.ing Ka!ue and
7omentum across 5sset $!asses\, ,ournal of Portfolio Management, &o!0 3B, no0 ', pp0 23#3)0
:odie et a! 2,'', 4nvestments and Portfolio Management, (th edn, 7c3ra#8i!! 8igher Education, United
=ingdom0
:o.er, :080, 3ibson, 70S0 ; Loretan, 70 '((*, Pitfalls in Tests for Changes in Correlations0
:O.OkSahin, :0, 8aigh, 70S0 ; Robe, 7050 2,,(, \$ommodities and E1uitiesD E&er a \7arket o/
%ne\S\, ,ournal of lternative 4nvestments, &o!0 '2, no0 3, pp0 *@#(B0
$ampbe!!, R0, =oedi>k, =0 ; =o/man, 60 2,,2, \Increased $orre!ation in :ear 7arkets\, 2inancial
nalysts ,ournal, &o!0 B), no0 ', pp0 )*0
$oaker II, "0Q0 2,,@, \The Ko!ati!it. o/ $orre!ation\, ,ournal of 2inancial Planning, &o!0 '(, no0 2, pp0
B)#@(0
9e :ondt, "0 ; Tha!er, R0 '()B, \9oes the Stock 7arket %&erreactS\, ,ournal of 2inance, &o!0 4,, no0
3, pp0 *(3#),B0
Eng!e, R0 2,,2, \9.namic $onditiona! $orre!ationD 5 Simp!e $!ass o/ 7u!ti&ariate 3enera!i?ed
5utoregressi&e $onditiona! 8eteroskedasticit. 7ode!s\, ,ournal of 9usiness and :conomic Statistics,
&o!0 2,, no0 3, pp0 33(#3B,0
2ama, E020 ; 2rench, =0R0 '((@, \7u!ti/actor E-p!anations o/ 5sset 6ricing 5noma!ies\, ,ournal of
2inance, &o!0 B', no0 ', pp0 BB#)40
2arine!!i, S0, 2erreira, 70, Rosse!!o, 90, Thoen., 70 ; Tibi!etti, L0 2,,), \:e.ond Sharpe RatioD
%ptima! 5sset 5!!ocation Using 9i//erent 6er/ormance Ratios\, ,ournal of 9anking and 2inance,
&o!0 32, no0 ',, pp0 2,B*#2,@30
Qegadeesh, C0 ; Titman, S0 '((3, \Returns to :u.ing "inners and Se!!ing LosersD Imp!ications /or
Stock 7arket E//icienc.\, ,ournal of 2inance, &o!0 4), no0 ', pp0 @B#('0
Linsmeier, T0Q0 ; 6earson, C090 2,,,, \Ka!ue at Risk\, 2inancial nalysts ,ournal, &o!0 B@, no0 2, pp0
4*0
58

Longin, 20 ; So!nik, :0 '((B, \Is the $orre!ation in Internationa! E1uit. Returns $onstantD '(@,#
'((,S\, ,ournal of 4nternational Money and 2inance, &o!0 '4, no0 ', pp0 3#2@0
Longin, 20 ; So!nik, :0 2,,', \E-treme $orre!ation o/ Internationa! E1uit. 7arkets\, ,ournal of
2inance, &o!0 B@, no0 2, pp0 @4(#@*@0
Loretan, 70 ; Eng!ish, "0:0 2,,,, :valuating ;correlation breakdowns; during periods of market volatility,
:oard o/ 3o&ernors o/ the 2edera! Reser&e S.stem GU0S0H, Internationa! 2inance 9iscussion
6apersD @B)0
7arkoit?, 80 '(B2, \6ort/o!io Se!ection\, ,ournal of 2inance, &o!0 *, no0 ', pp0 **#('0
Cee., "0=0 ; "est, =090 '()*, \5 Simp!e, 6ositi&e Semi#de/inite, 8eteroskedasticit. and
5utocorre!ation $onsistent $o&ariance 7atri-\, :conometrica, &o!0 BB, no0 3, pp0 *,3#*,)0
6ero!d, 5020 ; Sharpe, "020 '()), \9.namic strategies /or asset a!!ocation\, 2inancial nalysts ,ournal,
&o!0 44, no0 ', pp0 '@0
Ramchand, L0 ; Susme!, R0 '((), \Ko!ati!it. and $ross $orre!ation across 7a>or Stock 7arkets\,
,ournal of :mpirical 2inance, &o!0 B, no0 4, pp0 3(*#4'@0
Rei!!., 20=0 ; "right, 90Q0 2,,', \Uni1ue Risk#Return $haracteristics o/ 8igh#Vie!d :onds\, ,ournal
of 2i<ed 4ncome, &o!0 '', no0 2, pp0 @B0
Sharpe, "020 '((', \The 5rithmetic o/ 5cti&e 7anagement\, 2inancial nalysts ,ournal, &o!0 4*, no0 ',
pp0 *#(0
Tan, Q0 50, '()), E:i&ariate e-treme &a!ue theor.D 7ode!s and estimationF, 9iometrika *B, 3(*+4'B0
<akamou!ine, K0 ; =oekebakker, S0 2,,(, \6ort/o!io 6er/ormance E&a!uation ith 3enera!i?ed
Sharpe RatiosD :e.ond the 7ean and Kariance\, ,ournal of 9anking and 2inance, &o!0 33, no0 *, pp0
'242#'2B40
<i&ot, E0 ; "ang, Q0 2,,3, Modeling financial time series with S-Plus, 8eide!berg and Ce VorkDR
Springer0



.
59

#ppendi1
:e!o /o!!os some additiona! /igures and e1uations hich is not inc!uded in the resu!ts section, but
hich support the c!aims and /indings o/ this thesis0
$ifferent mo%ing *indo*s that s'pports the 'se of 26 months in the res'lts(

-
.
2
0
.
2
.
4
.
6
.
8
C
o
r
r
e
l
a
t
i
o
n
January 1986 January 1995 January 2004 January 2013
Time
Correlation IG Correlation HY
60 months moving window
1986 - 2013
Correlation between stock and bond markets
-
1
-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 1986 January 1995 January 2004 January 2013
Time
Correlation IG Correlation HY
6 months moving window
1986 - 2013
Correlation between stock and bond markets
60




"alc'lation of the "itigro'p Ci3'idit! inde1(
__u.2
(Swoption pricc)
2uu.7
-
Rotc Swops
u.68
+
Swop SprcoJs
22
+
I0
CS
inJc
7.71
+
II uturcs
11.u
-1.2u7
-
1
-
.
5
0
.
5
1
C
o
r
r
e
l
a
t
i
o
n
January 1986 January 1995 January 2004 January 2013
Time
Correlation Gold Correlation Oil
6 months moving window
1986 - 2013
Correlation between stock and commodities markets
-
.
4
-
.
2
0
.
2
.
4
C
o
r
r
e
l
a
t
i
o
n
January 1986 January 1995 January 2004 January 2013
Time
Correlation Gold Correlation Oil
60 months moving window
1986 - 2013
Correlation between stock and commodities markets