2013-01-21

What's in, an "uncorrelated," market?

Folks on Twitter are jibbering today about why the KLSE is majorly down today. Generally my thought is that it's risk-on in developed markets, and Malaysia being a so-called uncorrelated market, gets funds pulled out of it as a result. This happens on a monthly to quarterly scale, if I correctly understand my trading experience from last year. Moreover, we do have elections within a month or three, as they've noted, and therefore it's time to be risk-off-Malaysia.

I asked myself, what does it mean to be an uncorrelated market, beyond the superficial difference in one descriptive statistic? I then had a thought, that "uncorrelated," markets such as ours are probably distinguished by being "inversely correlated," but within certain short-term parameters. A rising tide lifts all, and so in the longer-run, an export-oriented economy, like Malaysia, will follow the trend of the global economy. But in the shorter-term, as Malaysia is an "alternative investment market / asset class," fund flows between places like Malaysia and developed markets seem like they should be inverse: when people are steadily growing confidant about the direction of popular investments (volatility goes one way), they are jittery about the direction of unpopular ones such as we are (volatility goes the other way).

Not that I have any serious training in economics. I'm just a student trying to learn how to trade, and pay the bills. I might even have misunderstood some of these terms completely.

Note: in case you didn't know about this, the KLSE is said to be rather inefficient because capitalisation is dominated by two large government funds. That might have something to do with our uncorrelation, a pure musing on my part, and I have not done any quantitative analysis in this area. A dominance of capitalisation however, may not imply a dominance of trading activity - but we are also known, from what people tell me, as a market with a relatively high degree of insider trading. I am not a professional trader, or finance professional of any sort, so take anything you read here with a mug of salt. Many other writers in Malaysia have far more developed thoughts than this. Just search for their blogs online.

Further point of interest: Japanese markets were thrashed today. Japan is Malaysia's third-largest trade partner, after Singapore and China (the largest). It would be interesting to graph (model the network of) economic regions, as trade partners, with edges weighted by share-of-mutual-trade, to see if this graph could lend us any insight into the correlation of markets (for various asset classes) in each pair of economic regions. I'm sure there's lots of data that could be used to generate more directed and undirected edges, for a network model, and it seems that someone somewhere should be doing this already. Don't the big think tanks and research operations do this on a global basis? One wonders to what degree.

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