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2018 Sept Question 1 iv

H

Helloall

Very Active Member
Hi,

I was wondering how you would know this from the solution

"
- Interest rates up has a negative correlation with other market stresses. [1]
- Interest rates up has a negative correlation with other non-market stresses.[1]

"

My understanding would intuitively say that if interest rates go up then mortgages become more expensive and property values decrease. Hence interest rates up and property values down are positively related.
Also, if interest rates go up more people pull money out of the stock market and invest in debt instruments. Again a positive correlation.
 
Helloall said:
Hi,

I was wondering how you would know this from the solution

"
- Interest rates up has a negative correlation with other market stresses. [1]
- Interest rates up has a negative correlation with other non-market stresses.[1]

"

My understanding would intuitively say that if interest rates go up then mortgages become more expensive and property values decrease. Hence interest rates up and property values down are positively related.
Also, if interest rates go up more people pull money out of the stock market and invest in debt instruments. Again a positive correlation.
Click to expand...
Hi
We know that 'interest rates up' must have a negative correlation with other stresses, because the undiversified SCR is positive (800) but the diversified SCR is negative (-50) for the 'interest rates up' stress in the table given in the question.
There must be a negative correlation, because the impact of the 'interest rates up' stress reduces the overall SCR when it is combined with the other stresses. So one possible reason for this effect is that 'interest rates up' has a negative correlation with other market stresses, and another reason could be that 'interest rates up' has a negative correlation with non-market stresses. Although your points do explain standard relationships between these drivers, there must be something in this particular scenario that is causing them to behave differently - and that is all we can deduce from the information provided in the question.
Hope this helps
Thanks
 
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