Market Instruments Correlation
I have math and CS background, but my finance knowledge is limited. I often encounter claims about correlation of market instruments and various phenomena(ex. higher inflation means cheaper bonds, higher interest rates mean lower stock prices, etc). I was wondering if there is any concise and precise listing of such correlations with the reasoning behind them. I feel that such a resource would strengthen my finance intuition and show me how to think about these things. Thanks
Why don't you just run the correlations yourself?
Well, I meant more like finance common sense stuff, not really numerical correlation, but more like positively vs. negatively vs.not correlated.
Higher interest rates means lower stock prices because the discount rates used to find the present value of dividends increases.
i thought higher interest rates = less demand for safety assets such as treasuries = more demand for "risk-on" assets such as equities = higher stock prices (also higher prices for other "risk-on" assets such as AUD, CAD, NZD, copper etc)
Higher interest rates basically mean that money way out in the future gets cheaper. The real difference between bond and stock performance comes from the risk premium. In general, stocks are riskier than bonds. That said, there are always exceptions. When inflation fears start coming into play, very boring inflation-adjusted financial products can sometimes look safer than long-term government bonds.
TIPS are a good measure of the true risk free interest rate, but they are still imperfect because of sovereign risk. Real interest rates can sometimes go negative in stagflationary scenarios. This has happened a couple of times in the past three years and likely happened a number of times in the '70s. (I say likely because TIPS are only 12 years old.)
Any collection of stuff like this online perhaps?
It would be a much better learning exercise for you to come up with lets say 10 correlation hypothesis and then run the numbers yourself. You might also want to find 10 popular ones and run the correlations, you might just find some trading opportunities :)
Dollar Vs. Commodities...
No, but you can find the necessary historical price info.
What we are talking about is basic bond pricing and div discount model.
Two books to check out...
From Here to Economy: A Shortcut to Economic Literacy by Todd G. Buchholz and The Fed : The Inside Story How World’s Most Powerful Financial Institution Drives Markets by Martin Mayer
Or are you more referring to finacial engineering?
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