Correlation Surprise
By David Turkington, State Street Associates, William Kinlaw
Apr 1, 2019
By William Kinlaw and David Turkington
Published in the Journal of Asset Management, January 2014
We extend Kritzman and Li’s study by disentangling the volatility and correlation components of turbulence to derive a measure of correlation surprise. On average, after controlling for volatility, we find that periods characterized by correlation surprise lead to higher risk and lower returns to risk premia than periods characterized by typical correlations.