Estimating serial correlations

Quantitative Risk Management in R

Alexander McNeil

Professor, University of York

Sample autocorrelations

• Sample autocorrelation function (acf) measures correlation between variables separated by lag (k)
• Stationarity is implicitly assumed:
  • Expected return constant over time
  • Variance of return distribution always the same
  • Correlation between returns k apart always the same
• Notation for sample autocorrelation: $\hat{\rho}(k)$

The sample acf plot or correlogram

acf(ftse)

The sample acf plot or correlogram

acf(abs(ftse))

Let's practice!

Quantitative Risk Management in R