[R-SIG-Finance] How to find lead-lag relation in two time series?

Thomas Etheber etheber at gmx.de
Sat Feb 20 18:30:39 CET 2010


Price time series will usually have a positive drift and thus are 
non-stationary.
As far as I know most methods of time series analysis deal with 
stationary series and if you want to analyze a non-stationary series, 
you should transform  the series and obtain a stationary version of the 
raw data first.
Return time series are usually (or at least assumed to be) stationary 
and thus your focus should lie on returns rather than prices..

Hth
Thomas



Michael Jungle schrieb:
> Thx but why? I want buy/short based on price correlations right? Not returns...
>
> On Saturday, February 20, 2010, Patrick Burns-2 [via R]
> <ml-node+1562668-773442928-108803 at n4.nabble.com> wrote:
>   
>> You want to use returns, not prices.
>>
>> Correlations with prices are spurious.
>>
>> (The extreme example is to think of
>>
>> a long set of series with inflation --
>>
>> all the price series will be positively
>>
>> correlated.)
>>
>>
>>
>> On 19/02/2010 23:15, Michael Jungle wrote:
>>
>>     
>>> One possibility is to do the cross-correlation.
>>>       
>>> What series shall I apply cross-correlation to? Price or return series?
>>>       
>>> If I do cross-correlation on two price series, and found some large
>>>       
>>> correlation numbers,
>>>       
>>> and then do cross-correlation on two return series, and found no significant
>>>       
>>> numbers(almost zero),
>>>       
>>> What does that mean?
>>>       
>> --
>>
>> Patrick Burns
>>
>> [hidden email]Â <http://n4.nabble.com/user/SendEmail.jtp?type=node&node=1562668&i=0>
>>
>> http://www.burns-stat.com
>>
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