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I would like to calculate asset correlations while excluding movements resulting from the denominating currency (as much as possible). My common sense tells me that any two assets with the same denominator are going to have higher correlation, then the underlying securities.

The dollar index, or forex quotes, would only represent foreign exchange

When "all" assets appreciate in value, this could in my view also simultaneously be a devaluation of the base curreny.

For now i just take a mean of log returns from a diverse set of asset classes, but that is an approximation at best.

What would be a good way to calculate this?

Thanks in advance

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  • $\begingroup$ Can you give a (real or made up) example of "two assets with the same denominator [having] a higher correlation, than the underlying securities". I don't quite follow what you are saying here. Thanks. $\endgroup$ – Alex C Sep 16 '17 at 22:41
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    $\begingroup$ Lets take US stocks: they are traded in USD, if they move up together it can be a result from a USD devaluation. Thats what i want to exclude from my correlation calculations as best as possible. $\endgroup$ – user29630 Sep 16 '17 at 22:44
  • $\begingroup$ Whether you measure the correlation between GM price and Ford price in Dollar terms or in Euro terms you get the same result. And as far as I know there is no way to measure correlation "without regard to any currency"; in Economics value is always measured relative to a currency (or basket of currencies). $\endgroup$ – Alex C Sep 17 '17 at 12:57
  • $\begingroup$ "What is the ideal currency exposure for my portfolio" is an interesting (but separate) question. And the exposure from the assets you own can be modified by currency hedging. But every portfolio has to be in some currency(ies) you choose (what George Soros in one of his books called "the existential choice"). $\endgroup$ – Alex C Sep 17 '17 at 13:44
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Here is two ideas that comes to mind:

1.) - Take the derivative of CPI as a % with respect to Wage growth as a % - Take the derivative of PPI as a % with respect to the derivative ((Composite revenue per share of SP500)/PB ratio)^-1 as a %

2.) Now find the standard deviation and other relevant descriptive statistics of some weighted index of both ratios.

3.) Benchmark the derivative of asset X as a % with respect to our measurement index. (choose derivative or difference based on what you are analyzing for)

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