# Correlation among different sectors of the market

It is known that many sectors/industries within the stock market are correlated with each other. For example, using VIF as a measure of correlation, I have the following result:

Sector  ENERGY   CONSUMER STAPLES   CONSUMER DISCR   MATERIALS   INFORMATION TECH   INDUSTIRALS   HEALTH CARE   FINANCIALS   UTILITIES   TELECOM SVC
VIF    2.937214     4.268179      10.755497        6.150606     5.023864           14.064349       2.795279      6.054236     2.985639     3.360512


As you can see, VIF for most industries are greater than 5. I was just wondering if

1) there exists data for the uncorrelated sectors or

2) there eixsts a way to extract the "pure" part of a given return stream which is uncorrelated with other parts. I am not even sure if it's possible.

• That's the whole big field. PCA is a part of it, but there are more things to do. Please check out Grinold, R. C., & Kahn, R. N. (1999). Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk (2nd ed). McGraw-Hill.. – stans Aug 6 '18 at 18:28
• In particular, PCA is not enough because correlations (factor loadings) are notoriously difficult to estimate. They change from one period to another. They explode upwards or downwards during crises. For that reason, you might need to build a parametric or semi-parametric model for them. – stans Aug 6 '18 at 18:32
• @stans thank you so much for your advice. Are you aware of any sources related to the parametric/semi-parametric models you talk about? – Jun Jang Aug 6 '18 at 18:39
• Start with reading the book I suggested. People who are serious about factor models, in asset management and hedge funds, turn to the methods of machine learning sooner or later. – stans Aug 6 '18 at 18:54