Nice writeup by Beau Kramer on the absorption ratio, which very roughly speaking measures whether financial securities are moving in a highly correlated fashion or not. In a crises, correlations among risk-bearing assets tend to go to one — meaning that as investors panic (or get margin called), they tend to sell in an indiscriminate manner (sell first, ask questions later).
So the absorption ratio attempts to measure this panic through changes in overarching correlations. Like everything else in the highly uncertain world of finance, it’s obviously not foolproof — but it is a useful decision making tool.
