Chris,
“covariance matrix between shares shifted when the credit crunch hit. All of a sudden the correlations virtually doubled”.
Your ahead of me here, mate re the items underlined. Could you give a simplified explanation?
Any two shares will have some correlation - that is, they behave in the same manner to some extent. High correlation stocks often fall within the same sector - e.g. Rio Tinto and BHP Billiton being mining stocks (r^2 -> 1); shares that show no discernable pattern have 0 correlation (e.g. BHP and Vodafone), and assets that move in opposite directions have r^2 -> -1 (e.g. equities and bonds).
All these are are measured in normal market conditions. In a crash,
everything drops - so, for example in the FTSE100, shares that have previously behaved in opposition to each other (r^2 -> -1) start to exhibit the same price movements (R^2 -> +1).
It basically means that the ebbs and flows of different assets are wiped out; everything falls, ergo their correlations increase. In a "perfect storm" crash, all assets will drop together, despite their correlations during normal market conditions. It is of interest for hedging; there is something known as a "platinum hedge", which IIRC is the only way to prevent a portfolio being wiped out.
“there is a window between the eighth and the tenth when they're unstoppable.” Excellent.
In my day there was actually a specific time and place for these cheeky few; every social (read circle) had a set timetable, with slots allocated for playing games and vomiting, singing songs, chatting up the filth, before more drinking, dancing, and getting your c0ck out.
It has been known for certain individuals to open, close, and seal the deal in between the singing and the dancing. Attached is the only newspaper cut out I can show my mum.
Still get through more skirts than the footballers though, now they really are all talk and no trousers.
