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.

BREAKING DOWN '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.

  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 Coefficient

    A measure that determines the degree to which two variable's ...
  4. Correlation

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

    The likelihood that a result or relationship is caused by something ...
  6. Contagion

    The spread of market changes or disturbances from one region ...
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