The major unwind last week was the first step. This was a major correlation warning signhttps://twitter.com/yolo58849655/status/1355439189177712641 …
My problem with this narrative is that pairwise correlation between stocks is driven by exposure to common return drivers, in particular how volatile those return drivers are compared with stock idiosyncratic vol — so it’s mechanically true that when the ...
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... realized vol of the market factor increases (ie risk aversion goes up) then stocks will be more correlated, because this is the one return driver that they are all positively exposed to. This happens most often in selloffs, so selloffs coincide with jumps in
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realized correlation, without any need to specify a causal relationship.
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