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.

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 InvestmentÂ (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.

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.

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 |

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.

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Thanks Said for dropping by. Very good idea. I will work on it.

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