### Using Multi-asset Correlations to Define Market Regimes

**May 9, 2013** - Strategic Allocation

Can investors use aggregate pairwise return correlations across asset classes to identify and exploit financial market regimes? In the April 2013 draft of their paper entitled “Handling Risk On/Risk Off Dynamics with Correlation Regimes and Correlation Networks”, Jochen Papenbrock and Peter Schwendner describe an approach for discovering market regimes based on pairwise correlations across 25 series of futures contracts spanning four asset classes. Each month, they calculate the set of pairwise correlations for these series based on daily returns and assign the resulting correlation structure to one of five regimes. They then look at the data within each regime to count the number of distinct groups of assets based on correlation clustering, with the potential that investors could view clusters as de facto asset classes. Using daily returns for 25 series of rolling futures contracts (six government bonds, seven equity indexes, six commodities and six currency exchange rates) during July 1998 through January 2013 to generate 175 sets of 25×25 monthly correlation matrices, *they find that:* Keep Reading