Online ISSN: 2519-9730 | Print ISSN: 2523-0565
Volume 2 Number 9 September 2017
Using Ratios of Successive Returns for the Estimation of Serial Correlation in Return SeriesPages: 125-130
Authors: Erhard Reschenhofer
This paper proposes to estimate the first-order autocorrelation of asset returns by the rescaled sample mean of suitably transformed ratios of successive returns. The simplicity of this estimation method allows the monitoring of the stability of the estimates over time and the almost instantaneous detection of any structural break without any delay caused by an estimation window. In an empirical study of index returns, its use considerably increases the profitability of a simple trading strategy which switches between the index and cash.