What Brian wrote. A good place to start is John C. Hull's "Bible"-
"Options, Futures, & Other Derivatives". Start with Ch. 13 and go from
there.

On Mon, 2010-02-22 at 15:13 -0600, Brian G. Peterson wrote:

> Michael Jungle wrote:
> > But we trade on prices, right? How do you trade on returns? 
> >
> > My preliminary understanding is "whatever we trade on, we should find
> > correlation, etc. there...". 
> >
> > If you find lead-lag relations on returns, how do you trade them?
> >   
> You've already been given the answer. 
> 
> Correlations on prices produce spurious results. 
> 
> Go do some research.  The literature will agree with what you've been 
> told here.
> 
> Returns may be turned back into prices (or more appropriately, a wealth 
> index)
> 
>   - Brian
> 



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