The MIM has data for a variety of cash and futures prices. At any point in time a risk management group may want to know how correlated any two products are.

With the extensive MIM database, we can do correlation analysis on hundreds of instruments in seconds. Let’s look at how the cash closing price of natural gas is correlated with various energy futures in the standard database package. At certain times the movement of one product closely tracks the other. The MIM can help quantify when this co-movement exists. Using the correlation study, we can find periods when the movement of these two instruments is closely linked. The correlation coefficient [r] can range from +1 to -1. A correlation coefficient of r=+1.00 signifies a perfect positive linear relationship (i.e. a +1 percent move in brent crude oil would a+1 percent move in natural gas).

The r^2 (r*r=r squared) indicates the proportion of the variance in one variable accounted for, "explained", or predictable from the variance of another variable. For example, if we find a correlation of r=.8 between 2 variables means that .64 (.8 squared) or 64% of the variance of the scores in the other variable (say, natural gas).

LET

     EnergyFut = CL, FB, FP, HO, NG, RB.UNL

 

   SHOW

     r: 180 day correlation of Close of EnergyFut and Cash of NG 

     r^2: 180 day correlation of Close of EnergyFut and Cash of NG  * 180 day

          correlation of Close of EnergyFut and Cash of NG 

   WHEN

       Date is 8/21/1997

     AND

       EnergyFut is DEFINED

 

Col 1 tab represents the correlation coefficient [r]:

Col 2 tab represents the r^2 (r*r=r squared):