Equity Interest Rate Correlations
Document ID: 2007-317 (previously 2007/001)
Published on: 1st March 2007
Author: Colin Holmes
Within the ESG we control correlations between observable quantities via correlations between stochastic shocks. This quite easily allows us to control, for example, the correlation between changes in interest rates and excess equity returns over some time period. But what is the level of correlation between the level of interest rates and the return (over a single time period) on equity-type assets? It is interesting to note that, even if we specify zero correlation between shocks to interest rates and equity factors (which generate excess returns), there is a nontrivial correlation between total returns and the level of interest rates.
