What is co-relation between Bond & Equity | Ep 3 (Part 2) of A-Z Series

Pearson correlation measures linear dependence between two return streams as a single number between minus one and plus one. Compute it across thousands of instruments and you get a correlation matrix, the structural map of how the market moves together. Pairs that share a factor (same currency leg, same sector, same risk regime) cluster near plus or minus one by construction. The residual between them, fit by OLS, is the variance the shared factor cannot explain. If that residual is stationary,

Correlation is just a way of describing how two things change together. If one tends to go up when the other goes up, they’re positively related; if one goes up while the other goes down, they’re negatively related; and if there’s no clear pattern, then there’s no real relationship. The important catch is that even when two things seem connected, it doesn’t mean one is causing the other (hello, nondeterminism). -- Made with Umbra Beta #math #statistics #datavisualization #stem #learning