Relative Volatility Versus Correlation Tightening
Beta is a composite measure. It reports not only the ratio of asset-specific volatility to market-wide volatility, but also the correlation between asset-specific and market-wide prices or returns. Closer examination of these components of beta, especially in conjunction with single-sided definitions of semideviation, semivariance, and semicovariance, reveals parameters indicating changes in relative volatility and correlation tightening. The behavioral implications of these competing components of beta correspond to the psychological distinction between fast, System 1 instinct and slow, System 2 thought.