Inverse Correlation

Definition of 'Inverse Correlation'


A contrary relationship between two variables such that they move in opposite directions. In an inverse correlation with variables A and B, as A increases, B would decrease; as A decreases, B would increase. In statistical terminology, an inverse correlation is denoted by the correlation coefficient r having a value between -1 and 0, with r = -1 indicating perfect inverse correlation.

Also known as negative correlation.

Investopedia explains 'Inverse Correlation'


In financial markets, the best example of an inverse correlation is probably the one between the U.S. dollar and gold. As the U.S. dollar depreciates against major currencies, gold is generally perceived to rise, and as the U.S. dollar appreciates, gold declines in price.

Two points need to be kept in mind with regard to negative correlation. First, the existence of negative correlation (or positive correlation, for that matter) does not necessarily imply a causal relationship. Second, the relationship between two variables is not static and will fluctuate over time, which means that they may display an inverse correlation during some periods and a positive correlation during others.



comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by additional investment would not warrant the expense. A harvest strategy is employed when a line of business is considered to be a cash cow, meaning that the brand is mature and is unlikely to grow if more investment is added.
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes.
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes.
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer to government spending rather than business or individual spending. When referring to accrued federal government deficits, the term "national debt” is used.
Trading Center