Correlation vs. Causation Explained Simply

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 ≠ causation ⚠️

Correlation or Causation? 🤔 #mapwhatever #germany #autobahn #cars #correlation

there’s a correlation between how many times you fold your paper and how long it takes to get turned