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Factor Exposure Analysis 115: Measuring International Exposures

Should correlated independent variables be avoided?

Nicolas Rabener
10 min read
12 May 2025

SUMMARY

  • Variables used in a factor exposure analysis should be uncorrelated
  • However, adding correlated equity indices can increase the explanatory power
  • Also, provides clearer insights on the performance & risk contributors

INTRODUCTION

India’s economy stands out as a strong performer, supported by a pro-business government, a manageable public debt-to-GDP ratio of 80%, and a youthful population with an average age of 30. In contrast, China faces challenges with a less business-friendly environment, soaring public debt exceeding 300% of GDP, and an aging population with an average age of 39.

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