How Do Market Crashes Affect the Correlation between a Volatile Collateral Asset and the Underlying Derivative? ▴ Learn

How Do Market Crashes Affect the Correlation between a Volatile Collateral Asset and the Underlying Derivative?

During market crashes, the correlation between a volatile collateral asset (e.g. BTC) and the underlying derivative (e.g.

BTC perpetual future) often approaches 1 (perfect correlation). This means that as the derivative's price falls, the value of the collateral backing the position also falls simultaneously.

This "double-whammy" effect drastically accelerates the decline in the trader's equity, rapidly triggering margin calls and cascading liquidations, thereby increasing systemic risk for the exchange.

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