What is Decoupling?
Decoupling refers to instances in which security prices behave contrary to normally-occurring correlations.
How Does Decoupling Work?
Movements in the price of different securities may be directly or indirectly correlated. In other words, as a given type of security rises in price, the price of another type of security might be expected to fall or also rise depending on its exposure to market dynamics. Decoupling refers to the divergence in securities' expected price behavior vis-à-vis one another.
For instance, the stock and bond prices for a given company generally rise and fall in response to fluctuations in market demand. However, a rise in the price of the stock accompanied by a rise in interest rates causing the market value of the bond to move in the opposite direction would constitute decoupling.
Why Does Decoupling Matter?
Investors and analysts rely on security price correlations in order to gauge market trends and help with strategic decisions. Investors and analysts should be aware of discrete changes in market dynamics that might require them to investigate thoroughly such price relationships under certain circumstances.