ASX Correlation Index

The Australian Stock Exchange correlation index is a measure of the extent to which systematic risk dominates idyiosyncratic risk in market movements. Periods of high systematic risk are associated with crises, economic news and policy leavers such as high interest rates which affect all shares equally.

Common movement is calculated from the exponentially weighted moving variance-covariance matrix, of the ASX sector indices:

where is the weight, is the sample average mean returns, and the vector of sector returns. In the following analysis is 0.07.

The weekly exponentially weighted moving variance-covariance matrix is summarised using two alternative measures:

1. Converting the covariance matrix to a correlation matrix and taking the simple average of all the pairwise correlations (excluding the diagonal), where is the is the square root of the diagonal of the covariance matrix.

2. Calculating the percentage of variance explained by the first principal component:

In 2026 the common market movements are quite low. The low systematic risk reflects the highly differing impacts of recent events such as trade tensions, the wars in Iran and Ukraine, and artificial intelligence on individual sectors in the Austalian stock market.