sluggo wrote:A project like this one opens up all kinds of uncomfortable questions that are hard to answer initially.
levijean wrote:sluggo wrote:A project like this one opens up all kinds of uncomfortable questions that are hard to answer initially.
I have spent a lot of time on this subject and have not yet reached any conclusions on the answers to these "uncomfortable questions". The problem you run into is correlations change so much from period to period that relying on past measurements to make decisions for the future is very difficult.
sluggo wrote:A somewhat more advanced question is: "Am I interested in the correlations of instrument price returns (which are the INPUTS to mechanical trading systems), or am I interested in the correlations of instrument equity returns (which are the OUTPUTS of mechanical trading systems)?" In my experiments, with the kinds of systems and instruments I typically test, the outputs of trading systems quite often have lower correlation than the inputs. But of course that's just anecdotal; try it for yourself and see.
levijean wrote:I'm having trouble comprehending why the outputs would have a different correlation than the inputs (assuming the same time frame, system, etc).
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