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I'm planning to start a strategy on SP500 hedging losses on USDJPY, because USD usually goes the opposite of SP500. I'm also considering other symbols (USDCAD, USDCHF, USDX) I just took the charts of SP500 and USDJPY and they are effectively quite uncorrelated, exception for 2008 crisis on SP500...I noticed that during 2008 also USDJPY went down...so I'm asking what are the fundamental reasons...

1 - why both SP500 and USDJPY went down during 2008 if they are uncorrelated and US dollar went up during 2008? I know that it means JPY performed better than USD if USDJPY went down, but what are the fundamental reasons?

2 - the fundamental reasons underlying the fact that both went down in 2008 can happen again so that counting on USDJPY to hedge the SP500 doesn't worth it? Because I noticed that correlation between them in the last years has been increased, in fact in 2022 there has been a high uncorrelation.

Thanks Regards

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    $\begingroup$ the "fundamental reason" is commonly thought to be repatriation of capital by Japanese investors during periods of rising risk aversion leading to weaker XXX/JPY. $\endgroup$
    – user42108
    Jul 14, 2022 at 20:20

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  1. The very definition of uncorrelated is that the two asset class return is not really related, at least by the correlation measure. It means they can independently go south together

  2. An old saying goes, every asset classes correlation goes to 1 in times of crisis (or something like that, I forgot the exact wording)

Frankly, you will be very well paid probably for the rest of your life if you can propose a model that hedges SP500 with little loss of return. Such a model would not just be simply holding JPY. Even if it did, it would had be arbitraged away already by quants.

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  • $\begingroup$ I haven't misunderstood anything: an uncorrelation of 100% means the 2 assets are inverse. $\endgroup$
    – Giova Next
    Jul 15, 2022 at 12:31
  • $\begingroup$ @GiovaNext You're wrong. Work on your understanding of these terms. If you can't communicate clearly with the people on this forum they can't help you. $\endgroup$
    – Bob Jansen ♦
    Jul 15, 2022 at 13:05
  • $\begingroup$ @GiovaNext If the assets are inversely related they are not uncorrelated (corr=0), they are negatively correlated, (corr<0). $\endgroup$
    – Preston Lui
    Jul 15, 2022 at 13:45
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You are confusing several different factors and words. First, I think the word you are looking for is "anti-correlated". And while at time's the inverse relationship holds, it is by no means bullet proof. Pull up a chart that includes the 1990s. There's no relationship there either.

Now why did USDJPY collapse during 2008? Simple, the US banks failed.

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I think you mistake a correlation of 0 with a correlation of -1.

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