How Correlated Were CROBEX and S&P500 in 2020?

In 2020, the coefficient of correlation between CROBEX and S&P500 was 0.62.

If you have been following both Croatian and the US equity market in 2020, you might have seen certain similarities in the movement of CROBEX and S&P500 in the beginning of the pandemic. Since then the correlation between the indices has substantially decreased, so we decided to look at the how correlated were the indices in 2020.

While S&P500 ended the year with a very solid increase of as much as 16.3%, CROBEX has lagged behind its regional peers and ended the year at -13.8%. There are many reasons for such a difference in performance between indices, but it is worth pointing out that technology companies which have benefited to some extent in this pandemic account for roughly one fifth of S&P500 (such as Microsoft, Amazon, Google etc.). Meanwhile, many CROBEX heavy-weights were quite affected by the Covid-19 crisis.

Performance of CROBEX and S&P500 in 2020

If we were to take a closer look at daily movements of the indices, one could have observed an interesting correlation during March and April, which is visible in the graph below. Since the Covid-19 outbreak, one can notice that almost every time in March and April when S&P500 recorded a sharp daily increase or decrease, the same movement of CROBEX was observed. This can be also confirmed when calculating the coefficient of correlation of March and April returns of both indices, which amounts to 0.77 and 0.55, respectively, showing a solid correlation between the movement of the indices. This has not been historically the case (to such extent) as the coefficient of correlation for the same parameters since 2007 amounts to only 0.36.

Such a correlation could imply that since the outbreak of the Covid-19 crisis many investors in the Croatian equity market were not necessarily basing their investment decisions on fundamentals or the local news, but rather on the global sentiment. This would not surprise us as many fundamental parameters were and are still in a very unknown territory such as the end of the Covid crisis, or the impact on the macro picture across economies.

Daily Change of CROBEX and S&P500 (%) in 2020

However, since than the situation has quite changed, which can be seen when looking solely at the correlation between the indices since May onwards (for each month individually).

Such figures show that the indices were not as correlated during the partial bounce back as they were during the drop. It is also worth noting that as more fundamental parameters become clear in the local market, it is reasonable to expect a lower correlation then the current (on the YTD basis). Interestingly enough, in November, we also observed a very low correlation between the indices, despite a positive sentiment globally which came on the back of vaccine news during which CROBEX surged by 8.1%, while S&P500 rose by 10.8%.

Coefficient of Correlation (CROBEX vs S&P500)

If we were to run a regression of daily returns of CROBEX and S&P500 in 2020, the slope of the regression gives us additional information of relative volatility of CROBEX. In the graph below, you can see that the slope of the regression amounts to 0.40 indicating that CROBEX has been roughly half as volatile as S&P500. So for example, an increase of 10% of the S&P500 would indicate a 4% increase of CROBEX.  

Regression of 2020 Daily Changes of CROBEX Against S&P500

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