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Autocorrelation

Autocorrelation is the measure calculated to find out that to which degree a variable is correlated to its past values.

Definition:

Autocorrelation is the measure calculated to find out that to which degree a variable is correlated to its past values. Autocorrelation is synonymous to “negative mean reversion. Autocorrelation (AC) for a time lag of one period is given by:

$ AC(\rho _{t},\rho _{t-1})= \frac{Cov(\rho _{t},\rho _{t-1})}{\sigma(\rho _{t})\sigma(\rho _{t-1})} $

AC: autocorrelation
pt: correlation values for time period t
pt-1: correlation values for time period t − 1
Cov: covariance

Example of Autocorrelation

Let’s suppose an analyst was to predict oil prices. If there is an existence of autocorrelation in the series, it means that past values of the oil series can be used to model future values. If there isn’t any autocorrelation present, it would be difficult to predict the oil prices using the time series models.

Owais Siddiqui
1 min read
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