Correlation estimated in a calm window can rise when you need it not to

riskPublished 20 October 20261 min readmulti asset

Key points

• Diversification depends on risks that are not the same risk.
• A stress period can raise the tendency of risky assets to move together.
• A number for that tendency needs a window and a source. This page does not supply a live one.

What is going on

BIS publications on market functioning describe how liquidity and risk appetite can change together. That literature is not a table of pairwise correlations for the holdings in your account. A portfolio result under a stress you care about is the weighted sum of the moves you are willing to assume. Assuming the calm-window offsets still apply is a different, stronger claim.

Why it matters

Common factors — a shared rate move, a shared funding squeeze, a shared sector — are why a long list of names can behave like a short list. The failure of diversification is often this, not a broken formula. Rebalancing toward targets does not restore the old correlations.

What to watch

Write the window any correlation came from. Write a stress in which the offsets fail, as a scenario with your assumptions, not as a probability.

Risks

Publishing a precise correlation without the sample would be false precision. This note refuses that number.