Question

137. Correlations of stocks between developed countries have mostly risen since the 1990’s. Which of the following is least likely to have caused such a phenomenon?

• correlations typically rise during periods of high volatility

• the rise of China

• increase in speed and accessibility of technology

• lower fees and trading costs

Answer 1

Lower Fees and Trading Costs --> Is the least likely phenomenon that can cause such a phenomenon, because lower fees and trading costs will lead more retail participation in the markets which lead to more noise in the market and noise leads to lesser correlation. The main market participants are generally now affected by fees and trading costs.

Increase in speed and accessibility of technology --> This leads to more connectivity and more information exchange, any event or news around the have effect on all the markets.  

The rise of China --> China has grown at a very fast rate and have become the trade center of the world, most of the countries export and import is through China. SO it has become a joint between the developed nations any positive or negative news related to it had impact on other developed countries

Correlations typically rise during periods of high volatility --> When market is in swings, no one knows the direction of the market thus most of the market participants takes cues from other markets, and ultimately lead their market in the same direction, thus increasing correlation.