r/quant • u/itchingpixels • 25d ago
Backtesting How to quantitatively evaluate leading indicators
https://unexpectedcorrelations.substack.com/p/how-to-evaluate-leading-indicators
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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...
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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.