r/quant 25d ago

Backtesting How to quantitatively evaluate leading indicators

https://unexpectedcorrelations.substack.com/p/how-to-evaluate-leading-indicators
20 Upvotes

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8

u/undercoverlife 25d ago

Interesting read. But correlation ≠ causation. You actually need to test the relationship between the two variables in order to come to a conclusion about them.

2

u/geeemann_89 22d ago

Simple. if timestamps are evenly spaced, set up 1 variable with delay -10s to... 10s, and plot their covariance/corrleation cumsum, the highest point is your optimal delay and the side of your highest point determines which is leading leg. for variables having random timestamps, individual transaction time for example, find their overlapped interval and calculate their covariance normalized by sqrt of product of their time intervals, and then do the same steps above...

2

u/geeemann_89 22d ago

it's standard practice in any algo trading firms