Autocorrelation, or serial correlation, is the correlation of one variable with itself over different time periods. This is important for testing whether stock returns behave like independent variables, which is an assumption of statistical tests of several important theories, including the Efficient Market Hypothesis (EMH).
To calculate autocorrelation for monthly returns with a 1-month lag, use nearly the same return stream except stagger the y-variable dependent variable by 1 month. In a basic 36-month example, the x-variable in the regression could go from Jan 2014-Dec 2016 and the y-variable would then go from Feb 2014-Jan 2017.
Synonym: serial correlation, cross correlation
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False, performance chasing could result in positive autocorrelation
Bud: Hey Guy, nice chart, eh? Solid uptrend,
nice doji, MACD, and strong momentum.
Guy: You are the Technician, but technically, it looks like autocorrelation to me.
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