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Why S&P 500 and USD/JPY Can Fall Together

Article Quant Q&A · Author: Giova Next
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Summary

The discussion explains why a zero correlation between the S&P 500 and USD/JPY does not imply that they must move in opposite directions. Uncorrelated returns can decline together, while a negative correlation would describe a tendency to move oppositely. The replies also distinguish a temporary inverse relationship from a dependable hedge: the relationship can vary across periods, and the 1990s are cited as an example with little apparent connection.

One answer attributes USD/JPY’s 2008 decline to failures among US banks, while another notes that crisis periods can bring broad changes in asset correlations. The exchange offers only brief explanations and no empirical analysis, correlation estimates, or tested hedging model. It therefore clarifies terminology and warns against assuming that holding yen reliably offsets equity losses, but does not establish a causal account of the 2008 moves or quantify hedge performance.

Key ideas

  • Zero correlation does not mean two assets must move in opposite directions.
  • Negative correlation describes a tendency to move in opposite directions, but it may not persist.
  • Assets can fall together during a crisis even when their broader return histories are uncorrelated.
  • The discussion cautions that USD/JPY should not be assumed to provide a dependable S&P 500 hedge.

Tags

EquitiesForexStatisticsRisk management
Full text
# Uncorrelation between SP500 and USDJPY?


# Uncorrelation between SP500 and USDJPY?












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

## Answer by Preston Lui (score 2)

https://quant.stackexchange.com/a/71598

- 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

- 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.

## Answer by fny (score 1)

https://quant.stackexchange.com/a/71599

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.

## Answer by Trader2B (score 1)

https://quant.stackexchange.com/a/71604

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

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