Real-world key correlations: The unconditional correlation between real short rate changes and equity excess returns
Document ID: 2009-1504
Published on: 9th July 2009
Author: Ruosha Li
This note sets out our methodology for estimating the unconditional (long-term) correlation between equity excess log returns and the changes in the real short-term (3 month) interest rate. We notice that there is a low and insignificant correlation between changes in the real short-term interest rate and equity excess returns.
This does suggest that the negative correlation between changes in the short-term nominal interest rate found in another Barrie & Hibbert research (Redfern, 2009) may be due to the inflation component. The targets will be updated once a year, and we plan to incorporate these targets into our standard real-world calibrations (with country specific equity targets) from 2009 Q2.
