Inverse Correlation

AAA

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.

RELATED TERMS
  1. Negative Correlation

    A relationship between two variables in which one variable increases ...
  2. Positive Correlation

    A relationship between two variables in which both variables ...
  3. Correlation

    In the world of finance, a statistical measure of how two securities ...
  4. Statistically Significant

    The likelihood that a result or relationship is caused by something ...
  5. Correlation Coefficient

    A measure that determines the degree to which two variable's ...
  6. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
RELATED FAQS
  1. Can I use the current yield to compare a bond to an equity investment?

    Investors should be careful when comparing the current yield on a debt security with the growth of an equity security. Yield ... Read Full Answer >>
  2. What is the difference between positive correlation and inverse correlation?

    In the field of statistics, positive correlation describes the relationship between two variables which change together, ... Read Full Answer >>
  3. How do I use the rule of 72 to estimate compounding periods?

    The rule of 72 is best used to estimate compounding periods that are factors of two (2, 4, 12, 200 and so on). This is because ... Read Full Answer >>
  4. How can I use Bollinger Bands® to spot options trading opportunities?

    Traders can use Bollinger Bands in a couple of different types of trading strategies. The most common strategy is using Bollinger ... Read Full Answer >>
  5. How can I run linear and multiple regressions in Excel?

    The first step in running regression analysis in Excel is verifying that your software has the capabilities to perform the ... Read Full Answer >>
  6. How do I calculate a modified duration using Matlab?

    The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  2. Forex Education

    How To Trade Currency And Commodity Correlations

    Relationships between currencies and commodities exist throughout the financial markets. Find out how to trade these trends.
  3. Forex Education

    Using Currency Correlations To Your Advantage

    Knowing the relationships between pairs can help control risk exposure and maximize profits.
  4. Insurance

    The Dangers Of Over-Diversifying Your Portfolio

    If you diversify too much, you might not lose much, but you won't gain much either.
  5. Active Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  6. Fundamental Analysis

    Understanding the Profitability Index

    The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness.
  7. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.
  8. Fundamental Analysis

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
  9. Economics

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  10. Fundamental Analysis

    Explaining the Empirical Rule

    The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!