EFF/KRF: When market volatility goes up, cross-country and cross-asset-class correlations tend to go up. When market volatility is normal, events that are specific to countries, asset classes, or individual firms are a larger part of total volatility and correlations are low. When market volatility increases relative to other sources of volatility, the common variation becomes a larger part of total volatility and correlations go up. This effect has been particularly apparent recently because volatility has been extraordinarily high.
Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.