Empirical Properties of Correlation: How do Correlations Behave in the Real World?

Gunter Meissner

“Anything that relies on correlation, is charlatanism”

– Nassim Taleb

In this chapter we show that, contrary to common beliefs, financial correlations display statistically significant and expected properties.


In our study, we observed daily closing prices of the 30 stocks in the Dow Jones Industrial Average (Dow) from January 1972 to July 2017. This resulted in 11,214 daily observations of the Dow stocks and hence 11,214 × 30 = 336,420 closing prices. We built monthly bins and derived 900 correlation values (30 × 30) for each month, applying the Pearson correlation approach (see Chapter 3 for details). Since we had 534 months in the study, altogether we derived 534 × 900 = 480,600 correlation values.

The composition of the Dow is changing in time, with successful stocks being input into the Dow and unsuccessful stocks being removed. Our study comprises the Dow stocks that represent the Dow at each particular point in time.

Figure 2.1 shows the 534 monthly averaged correlation levels: we created monthly 30 by 30 bins of the Dow stock returns from 1972 to 2017, derived

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