Authors : Luisa Trombetta Burić

Volume/Issue : Volume 8 - 2023, Issue 12 - December

Google Scholar : http://tinyurl.com/9jf9xbnp

Scribd : http://tinyurl.com/mvmha8u5

DOI : https://doi.org/10.5281/zenodo.10487914

Abstract : This paper explored the application of three widely utilized correlation coefficients - Pearson, Spearman, and Kendall in the context of financial data. The Pearson correlation coefficient, Spearman rank correlation coefficient, and Kendall's tau are extensively examined in capital market analyses for their ability to capture relationships between two or more financial variables such as investment funds rankings by different criteria (returns, risk, costs, etc.), market portfolio returns, stock exchange indexes and interest rates. For each coefficient, a hypothetical example was provided. First example was demonstrated application of Pearson’s correlation coefficient in analysing the relationship between stock returns and market index movements. Second example was demonstrated application of Spearman’s rank correlation coefficient in analysing the relationship between interest rates and bond prices. Finally, third example was demonstrated application of Kendall’s rank correlation coefficient in comparing fund rankings by three different criteria. Every hypothetical example provided instructions how these coefficients can be used for making informed business decisions in the capital market.

Keywords : Capital market, Pearson correlation coefficient, Spearman's rank correlation coefficient, Kendall's tau correlation coefficient.