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Why MSCI World Index and Futures Returns Can Be Weakly Correlated

Article Quant Q&A · Author: tweedi
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Summary

The document investigates why daily returns on the MSCI World total return index and its corresponding future show unexpectedly low correlation, despite sharing an underlying index. The response attributes the discrepancy to mismatched closing timestamps. The futures series uses its official settlement price from 5:45 p.m. UK time, while the index incorporates later closing prices, including the US market close at 9 p.m. UK time.

Because US equities account for a large share of the index, market moves during that interval can affect the index return without appearing in the futures settlement return for that date. This timing mismatch can reduce measured daily correlation, especially on days with significant late-session news or price movement. The explanation is specific to the price series and timestamps described; the document does not test alternative sampling conventions or show whether aligning observations restores the expected correlation. Checking settlement definitions and synchronizing return intervals is therefore important when measuring hedge relationships.

Key ideas

  • A futures contract and its underlying index can have different recorded close times.
  • The cited futures settlement is set before the index captures the US market close.
  • Late US market moves can appear in the index return but not the same-day futures settlement return.
  • Timestamp mismatches can lower measured daily correlation and distort hedge analysis.
  • Correlation comparisons should use price observations aligned to the same return interval.

Tags

EquitiesFuturesStatisticsRisk managementUS markets
Full text
# MSCI World and MSCI World future: low correlation, how come?


# MSCI World and MSCI World future: low correlation, how come?












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%+

Thanks

## Answer by tweedi (score 3)

https://quant.stackexchange.com/a/61907

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.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.