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mathdude2018
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Joined: January 10th, 2018, 4:35 pm

Correlation of A-B and C-D kind of assets

August 14th, 2020, 5:15 pm

This is a real life scenario where in the market I am able to transact only A - B and C - D, even though time series of A, B, C and D are published separately.

How do I find the correlation of A - B and C - D. To understand the order of magnitude, A, B, C, D are order of $50 while A - B, and C - D are order of $0.50. They can also turn negative or there are instances in time where A - B and C - D can be zero.
 
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Alan
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Re: Correlation of A-B and C-D kind of assets

August 15th, 2020, 3:15 pm

I don't get the issue. If you have time series for A,B,C,D then you can construct series for A-B & C-D and compute their sample correlation by a standard formula.
 
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DavidJN
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Joined: July 14th, 2002, 3:00 am

Re: Correlation of A-B and C-D kind of assets

August 16th, 2020, 2:53 pm

As for the difference in magnitude between the prices, convert the price series into rate of return series  - where rate of return is defined as ln(Pt/Pt-1) and  ln() is the natural log operator - and compute the correlation on the rates of return instead of the prices.

Stats 101. 
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