correlation for the uninitiated

Discussion in 'Trading' started by aPismoClam, Sep 14, 2006.

  1. let's say the correlation of B to A is 0.4, according to Bloomberg.

    is either following statement a correct interpretation of this infomation:

    "B will move in the same direction of A 4 times out of ten;"

    "B will move in the same direction of A with a magnitude of n*A 4 times out of ten;"

    or is there a better way to describe it?

  2. Here is an example that has exactly ten data points. The correlation coefficient is 0.408. In the first seven rows, A and B are equal. In the final three rows, A and B are not equal.

    These might represent the daily price changes of Asset A and Asset B, or perhaps the trade profits of System A and System B, or possibly the daily weight gains and weight losses of Patient A and Patient B.

  3. lol I do not even know where to move this one.
  4. rosy2


    first you correlate based on returns not levels. you can then say that 40% of a move is reflected in the other instrument
  5. move it to trollgrob's velocity shite, that would do fine.
  6. I heard that forum section is under debate for future implementation :D
  7. A correlation has an R-squared, which is the strength of the correlation (the closer to one the better), and then the dependent variables have a coefficient which measures the average change in the independent variable based upon a change in the dependent variable.

    The statement that you made sounds to me like the r-squared or adjusted r-squared are what are being described, and so that would be interpreted as B and A moving together 40% of the time. Your second statement would be correct if you meant n* to be the coefficient, or as you stated, the magnitude of the change.
  8. trom


    Keep in mind correlation does not imply causation. There might be another variable in play.
  9. lol wtf is that supposed to mean?

    I agree, there must be other threads that are worthy of your moderation.

  10. bang -- a spot on answer. thank you.
    #10     Sep 18, 2006