How market volatility affects correlations

Despite market volatility, the relationships between stocks typically remain persistent, says Adrian Banner, CEO and CIO at Intech Investment Management, and manager of the Renaissance U.S. Equity Fund.

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And, he notes, this fact holds true even during major market downturns. “The financial crisis was a big turning point in markets — certainly a lot of conventional wisdoms were overturned. Nonetheless, there were a number of relationships that held up.”

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For instance, let’s say stock A is more volatile than stock B in a calm market. If the volatility of both stocks increases during a crisis, stock A should still be more volatile than stock B.

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Banner explains, “Our strategy is we’re always looking to measure what’s present, and not assume anything about volatilities. [Still], we haven’t had to adjust how we measure the relative correlations and volatilities between stocks.”

His firm studies volatility, “not just as a source of risk, but also as a source of reward.” So he measures how stocks behave relative one another, as well as relative to benchmarks such as the S&P500, before making investment decisions.

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