Noticed today that hedging the MSCI World (NTR, div reinvested) by shorting it's very own future (same underlying index, also NTR) leaves a lot of active risk. This is explained by low correlation between the index and the future.

You can check with correl on BBG the correlation between ZWP1 and NDDUWI is only 80% over the past year using daily returns!

How do you guys explain this low correlation? I expected it to be 95%+


  • 5
    $\begingroup$ Timestamps misaligned? Futures end of day and index end of day values may be calculated at different times of the day, so it can affect both component prices and FX rates. Time zones matter if key components are listed overseas. $\endgroup$ Mar 22 '21 at 15:25
  • 4
    $\begingroup$ To reduce the time zone difference problem mentioned by Sergei Yurievich, you may want to use Weekly instead of Daily returns, what happens in that case to the correlation? $\endgroup$
    – noob2
    Mar 22 '21 at 16:23
  • $\begingroup$ Thank you both! $\endgroup$
    – tweedi
    Mar 22 '21 at 19:33

As correctly pointed out in the comments, this is due to "timestamp" differences. The future "settlement price" (the official closing price) is set at 5.45pm UK time. The future still trades but the historical price is taken at 5.45. If you look at historical prices in Bloomberg for ZWP1 they are from 5.45pm UK time. However the index (MSCI World) will take the actual closing price. Indeed the US still trades between 5.45pm and 9pm UK time and the index will take the close at 9pm for the US, while the future price has been set at 5.45pm. This affects daily correlation, especially on days where the US market moves significantly towards closure (could be due to any news). Additionally, the US has a weight of 60%+ in the index, so this difference in timings to get the closing prices of the future and the index really matters.


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