TASI sectors correlation

In this post, I explore the correlations between the different sectors in the Saudi stock market, TASI. The data set used is from 6-Jan-2007 to 27-Dec-2015.

R Lab 2_5
TASI sectors’ correlation matrix

First, some explanation about the above correlation matrix is in order. For readability, I have abbreviated the long sectors names; for example, TASI.BFS is the Banks & Financial Services sector. The full list of the sectors names and their abbreviations is listed at the end of this post.

Correlation is a number between -1 (negative correlation) and +1 (positive correlation). For readability, I use a scale between 1 (weak correlation) to 10 (strong correlation) to represent the strength of correlation between two sectors. Note that in the Saudi stock market the correlation between sectors are all positive.

Data Analysis

As mentioned above, correlations between sectors in the Saudi stock market are all observed to be positive correlations (i.e. not negative correlations between sectors).

The strongest positive correlation (around .85) is observed between the sector Industrial Investment (TASI.INI) and the sector Building & Construction (TASI.BDC). Below is a plot of the correlation between the daily log returns of both sectors. As you can see, the points in the plot are very close to each other.

R Lab 2_5 cor1
The strongest correlation is between TASI.INI and TASI.BDC

The weakest positive correlation (around 0.35) is observed between the sector Energy & Utilities (TASI.EU) and the sector Media and Publishing (TASI.MAP). Below is a plot of the correlation between the daily log returns of both sectors. As you can see, the points in the plot are very dispersed. However, regardless of the weak correlation, extreme price changes happens at the same time.

R Lab 2_5 cor2
The weakest correlation is between TASI.EU and TASI.MAP

That’s it for now. I’ll present more observations in the next post.

Thank you.

TASI Sectors Abbreviation

TASI.BFS Banks & Financial Services
TASI.PCI Petrochemical Industries
TASI.CMT Cement
TASI.RTL Retail
TASI.EU Energy & Utilities
TASI.AFI Agriculture & Food Industries
TASI.TIT Telecommunication & Information Technology
TASI.INS Insurance
TASI.MUI Multi-Investment
TASI.INI Industrial Investment
TASI.BDC Building & Construction
TASI.RED Real Estate Development
TASI.TRA Transport
TASI.MAP Media and Publishing
TASI.HTT Hotel & Tourism

 

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Author: Thamir K. AlHashemi

Practitioner in the fields of quantitative finance and risk management. A lifetime learner. Reading is the only hobby that I haven't failed in ;)

3 thoughts on “TASI sectors correlation”

  1. Thanks Thamer for sharing. Your posts are clear and informative.

    To take this post to the next level, I advise you to add another section where you elucidate how an ordinary investor would tap into your findings. For example, an investor should avoid forming a portfolio that has strongly correlated stocks, otherwise it is a deceptive diversification.

    Like

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