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I have a time series for a security list with 2 parameters calculated for each time period. For example, for a stock XYZ, I have Param1 and Param2 calculated over various time periods stacked against each other. I calculate the correlation between the two parametric series for each time period.

I see sudden drop in correlation for a certain time period, which I am not able to explain. The correlation drops from 0.5 to 0.02 for the same securities over consecutive time periods.

Can someone help me analyze what is causing the drop in correlation at the parametric level ? What changes/ differences should I look at to explain this change ?

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  • $\begingroup$ Could you please say what the securities are, and what is the time period? Otherwise, the best you could hope for is a guess. $\endgroup$
    – Shahar
    Commented Sep 18, 2014 at 19:40
  • $\begingroup$ Not sure what goes on: You calibrate two stochastic processes described by two parameters and then you verify the correlation between the two stochastic processes? $\endgroup$
    – pincopallino
    Commented Sep 19, 2014 at 9:07

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Depends how you calculating correlation, but probably you have rolling window from what you get high and low for calculation, when you adding samples to window then some samples must exit the window, when sample that exiting are not equal to high and low then it's don't matter, but when high or low is exiting then suddenly everything changes in your calculation.

Can't say more without specifics/details of your algorithm. Long shot.

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  • $\begingroup$ My first thought. I'd suggest the OP to try out his model with non-overlapping windows. $\endgroup$
    – pincopallino
    Commented Sep 19, 2014 at 9:06

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