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A new correlation coefficient for bivariate time-series data

Listed author(s):
  • Erdem, Orhan
  • Ceyhan, Elvan
  • Varli, Yusuf

The correlation in time series has received considerable attention in the literature. Its use has attained an important role in the social sciences and finance. For example, pair trading in finance is concerned with the correlation between stock prices, returns, etc. In general, Pearson’s correlation coefficient is employed in these areas although it has many underlying assumptions which restrict its use. Here, we introduce a new correlation coefficient which takes into account the lag difference of data points. We investigate the properties of this new correlation coefficient. We demonstrate that it is more appropriate for showing the direction of the covariation of the two variables over time. We also compare the performance of the new correlation coefficient with Pearson’s correlation coefficient and Detrended Cross-Correlation Analysis (DCCA) via simulated examples.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378437114006384
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Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 414 (2014)
Issue (Month): C ()
Pages: 274-284

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Handle: RePEc:eee:phsmap:v:414:y:2014:i:c:p:274-284
DOI: 10.1016/j.physa.2014.07.054
Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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  1. Kristoufek, Ladislav, 2014. "Measuring correlations between non-stationary series with DCCA coefficient," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 402(C), pages 291-298.
  2. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
  3. Zebende, G.F. & da Silva, M.F. & Machado Filho, A., 2013. "DCCA cross-correlation coefficient differentiation: Theoretical and practical approaches," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(8), pages 1756-1761.
  4. Zebende, G.F., 2011. "DCCA cross-correlation coefficient: Quantifying level of cross-correlation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(4), pages 614-618.
  5. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
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