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How to find lead-lag relation in two time series?

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How to find lead-lag relation in two time series?

Michael Jungle
Any systematic way in R of doing this?

Thanks a lot!
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Re: How to find lead-lag relation in two time series?

braverock
Michael Jungle wrote:
> Any systematic way in R of doing this? [find lead-lag relation in two time series?]
>  
Lots of them.

What theory of lead-lag relationships are you trying to replicate?  On
what type of data?
(those are important inputs to answering what tools are available))

  - Brian

--
Brian G. Peterson
http://braverock.com/brian/
Ph: 773-459-4973
IM: bgpbraverock

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Re: How to find lead-lag relation in two time series?

Michael Jungle
In reply to this post by Michael Jungle
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?
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Re: How to find lead-lag relation in two time series?

Eric Zivot
In reply to this post by Michael Jungle
The standard approach is to estimate a vector autoregression involving your
variables of interest and then test for Granger non-causality. See the vars
package and in particular the causality() function.


Eric Zivot                                
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-----Original Message-----
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[mailto:[hidden email]] On Behalf Of Michael Jungle
Sent: Friday, February 19, 2010 2:47 PM
To: [hidden email]
Subject: [R-SIG-Finance] How to find lead-lag relation in two time series?


Any systematic way in R of doing this?

Thanks a lot!
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Re: How to find lead-lag relation in two time series?

Patrick Burns-2
In reply to this post by Michael Jungle
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]
http://www.burns-stat.com

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Re: How to find lead-lag relation in two time series?

Matthieu Stigler
For lead and lags cross-correlation:

cc<-ccf(mdeaths, fdeaths,lag.max=4, plot=F)
cc
#but this function is rather ugly...

Patrick Burns a écrit :

> 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?
>

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

Michael Jungle
In reply to this post by Patrick Burns-2
Thx but why? I want buy/short based on price correlations right? Not returns...

On Saturday, February 20, 2010, Patrick Burns-2 [via R]
<[hidden email]> 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] <http://n4.nabble.com/user/SendEmail.jtp?type=node&node=1562668&i=0>
>
> http://www.burns-stat.com
>
> _______________________________________________
>
> [hidden email] <http://n4.nabble.com/user/SendEmail.jtp?type=node&node=1562668&i=1> mailing list
>
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> -- Subscriber-posting only. If you want to post, subscribe first.
>
> -- Also note that this is not the r-help list where general R questions should go.
>
>
>
>
> View message @ http://n4.nabble.com/How-to-find-lead-lag-relation-in-two-time-series-tp1562347p1562668.html
>
>
> To unsubscribe from Re: How to find lead-lag relation in two time series?, click here <http://n4.nabble.com/subscriptions/Unsubscribe.jtp?code=bWljaGFlbC5pbi50aGUuanVuZ2xlQGdtYWlsLmNvbXwxNTYyMzgzfDE5MDI3MzExNzk=>.
>
>
>
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Re: How to find lead-lag relation in two time series?

Thomas Etheber
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]
> <[hidden email]> 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
>>
>> _______________________________________________
>>
>> [hidden email]Â <http://n4.nabble.com/user/SendEmail.jtp?type=node&node=1562668&i=1> mailing list
>>
>> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>> -- Subscriber-posting only. If you want to post, subscribe first.
>>
>> -- Also note that this is not the r-help list where general R questions should go.
>>
>>
>>
>>
>> View message @ http://n4.nabble.com/How-to-find-lead-lag-relation-in-two-time-series-tp1562347p1562668.html
>>
>>
>> To unsubscribe from Re: How to find lead-lag relation in two time series?, click here < (link removed) =>.
>>
>>
>>
>>    
>
>  
> ------------------------------------------------------------------------
>
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Re: How to find lead-lag relation in two time series?

Sarbo
Thomas is right. One should never measure correlations based on prices-
it always leads to hugely inflated absolute correlations. It is not
uncommon for beginners to take correlations of prices and find, to their
delight, that correlations are as high as 70-90% on some assets. Then,
when they try to use spread option strategies to take advantage of the
tight correlations, they find that their strategies break down because
the actual correlations are only about 30-40%.

On Sat, 2010-02-20 at 18:30 +0100, Thomas Etheber wrote:

> 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]
> > <[hidden email]> 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
> >>
> >> _______________________________________________
> >>
> >> [hidden email]Â <http://n4.nabble.com/user/SendEmail.jtp?type=node&node=1562668&i=1> mailing list
> >>
> >> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> >> -- Subscriber-posting only. If you want to post, subscribe first.
> >>
> >> -- Also note that this is not the r-help list where general R questions should go.
> >>
> >>
> >>
> >>
> >> View message @ http://n4.nabble.com/How-to-find-lead-lag-relation-in-two-time-series-tp1562347p1562668.html
> >>
> >>
> >> To unsubscribe from Re: How to find lead-lag relation in two time series?, click here < (link removed) =>.
> >>
> >>
> >>
> >>    
> >
> >  
> > ------------------------------------------------------------------------
> >
> > _______________________________________________
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>
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>


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Re: How to find lead-lag relation in two time series?

Michael Jungle
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?
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Re: How to find lead-lag relation in two time series?

braverock
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

--
Brian G. Peterson
http://braverock.com/brian/
Ph: 773-459-4973
IM: bgpbraverock

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Re: How to find lead-lag relation in two time series?

Sarbo
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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