The DAX 30 is the most common benchmark for German and European markets. These 30 companies are reviewed each fiscal quarter by an independent body that may add or remove companies to reflect changes in market cap.
To be included in the DAX 30, a company must first be listed in the Prime Standard segment on the Frankfurt Stock Exchange. Companies that belong to this segment have to meet higher standards of transparency than companies listed on the General Standard segment.
Additionally, the company should be continuously traded in Xetra with a public float of at least 10%. Another requirement is to have an office registered in Germany with most of its volume of shares traded in Frankfurt, and be headquartered in one of the EU countries.
According to Blackwell Global, the DAX 30 has a more than 90% correlation with major US stock indices and a 70% inverse correlation to the Euro. The correlation between the DAX and its US counterparts has deviated at certain periods, for example when the 50-day correlation between the two went negative in 2018, indicating that underlying trends affecting worldwide assets temporarily changed.
For instance, if the EUR/USD currency pair advances, the DAX index usually depreciates, and on the other hand, when the Euro depreciates against USD, the DAX moves up. This phenomenon is used by traders to develop a successful trading strategy.
Another interesting fact is that the DAX is quite responsive to the European Central Bank or ECB policies. Major news releases in the Eurozone are likely to affect the index. This is because the correlation strategy helps mitigate risk since you’re making decisions based on proper information.
The correlation between different currency pairs and indexes can range between -1 to +1, and if the two instruments advance in the same direction, that’s an indicator of an ideal positive correlation. On the other hand, an ideal negative correlation would mean that the pairs or indexes will always advance in the opposite direction.
Finally, if the correlation coefficient is 0, the directions of two currency pairs or indexes are completely independent. While understanding the DAX, correlation strategy can be of great help for risk management, traders and analysts should know that correlation only matters when it comes to the directional relationship and not the scale of the movement.
For example, if the Euro is falling sharply, the DAX will likely rise, but not as sharply. Also, when developing your correlation strategy, keep in mind that correlations sometimes can fade unexpectedly.