Autocorrelation

The correlation of a series with its own past values. Positive autocorrelation makes volatility scale faster than the square root of time.

Where you will meet it

Autocorrelation comes up in 20 learning outcome notes across the FRM syllabus. A few of them:

• Fund Management
  FRM Part I · Financial markets and products

  “Hedge fund returns are more varied and often show negative skew, fat tails and serial correlation.”

• Multivariate Random Variables
  FRM Part I · Quantitative analysis

  “Observations with volatility clustering or autocorrelation are not iid, because they are dependent.”

• Measuring and Monitoring Volatility
  FRM Part I · Valuation and risk models

  “Positive autocorrelation makes it understate, and mean reversion in volatility makes it misstate.”

• Empirical Properties of Correlation: How Do Correlations Behave in the Real World?
  FRM Part II · Market risk measurement and management

  “The matching autocorrelation between successive observations is Autocorr = 1 − a × dt.”

See also

Correlation · Square root of time rule · Volatility

All terms beginning with A · FRM glossary

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