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Sunday, October 7, 2007

Rolling Correlations

One of the reasons to trade a portfolio of systems (like I do), is to reduce volatility. This works best if correlations between the systems are as close to zero as possible. It is interesting to track rolling correlations over time, and the figure below shows 100-day rolling correlations between ARS and Weekend Trader (red line), and a 95% confidence interval (blue lines, based on a simple bootstrap with 1,000 replications). See this post for a more detailed explanation.



The figure shows that for the most recent 100 trading days, the correlation between ARS and Weekend Trader was 0.42, down from a recent high at 0.62. I consider these numbers quite high--I'd prefer to have systems correlate less, because otherwise it doesn't matter much (from a volatility perspective) if I would trade only one system rather than multiple systems. So, I'll keep monitoring and hope it'll come down a bit in the next months.

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