Correlation Analysis

Cross-asset correlation analysis for diversification assessment, risk management, pairs trading signal generation, and portfolio construction.

Why Correlation Matters

Correlation measures how assets move together. In crypto markets this is critical for:

• Diversification: holding correlated assets provides no diversification benefit — you are effectively holding one concentrated position
• Risk management: portfolio risk depends on the correlation structure, not just individual asset volatility
• Pairs trading: highly correlated assets that temporarily diverge create mean-reversion opportunities
• Portfolio construction: optimal allocation requires accurate correlation estimates
• Crash protection: understanding tail dependence reveals whether assets crash together

Correlation Methods

Pearson Correlation

Linear correlation assuming normality. Most common but least robust for crypto.