I was talking to my brother-in-law, discussing how the price of oil affected various stock prices.
Then we wondered how similar was the DOW behaviour to, say the U.K. Index.
Then we wondered how ...
So I made up a spreadsheet that downloaded a year's worth of daily prices for a bunch of asset pairs
... then calculated the correlations between these pairs.
The spreadsheet looks like this (where you can click on the picture to download it):
Remember that, by "daily return", we mean the return from one market day to the next (whenever that occurs).
>So you compare, say, Wednesday's DOW return to Wednesday's China returns. What about comparing ...
Aah, yes ... compare DOW returns for Thursday or even Tuesday to the China return on Wednesday.
>You can delay the DOW returns by a day and ...
Or advance them by a day. Good idea!!
I've added that to the spreadsheet, like so
You can delay the first asset returns (like the DOW) or advance them and ...
>Who is 000001.SS?
That's the Shanghai Composite Index, however you can choose your own labels for the correlation chart so others can read and understand.
Note, however, that comparing asset returns from different countries has problems.
For example, there was a return for the Shanghai Index on Sept 26, 2008, but the next market day for that Index was Oct 6, 2008.
On the other hand, the DOW had daily returns for Sept 26, 29 & 30 and Oct 1, 2 & 3 as well as Oct 6.
The spreadsheet compares returns for Shanghai with the DOW on the maximum date which is less than or equal to the date for Shanghai ... plus-or-minus the selected delay.
Suppose the DOW delay is 0 days. Then Shanghai return for Sept 26, 2008, would be compared to the DOW on the same day.
If the DOW delay is set at 1 day, we'd be comparing the Sept 26 Shanghai return with the DOW for Sept 29.
On the other hand, if the DOW delay is set at 5 days, we'd be comparing the same Sept 26 Shanghai return with the DOW for Oct 3
(which is 5 market days later).
>So what to do, in that case?
Pray that this doesn't occur TOO often and that the correlation gives a reasonable comparison.
For example, comparing the DOW and Japan:
See? The Japan Index has a higher correlation of daily returns when compared to the DOW returns on the previous market day.
The implication is that the DOW influences the Nikkei, eh?
the DOW & Japan