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The Journal of Alternative Investments

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Article

Autocorrelation Effects on CTA and Equity
Risk Measurement

Galen Burghardt and Lianyan Liu
The Journal of Alternative Investments Summer 2013, 16 (1) 19-42; DOI: https://doi.org/10.3905/jai.2013.16.1.019
Galen Burghardt
is a senior director in the Alternative Investment Solutions Division of Newedge, LLC in Chicago, IL.
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  • For correspondence: Galen.burghardt@newedge.com
Lianyan Liu
is a director in the Alternative Investment Solutions Division of Newedge, LLC in Chicago, IL.
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  • For correspondence: Lianyan.liu@newedge.com
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Abstract

In recent years considerable research has examined the impact of historical return patterns on the measured risk of both traditional and alternative investments. At the heart of this analysis is the industry’s failure to take the strategy autocorrelation of a security or asset into account when measuring the asset’s underlying risk or in estimating the current risk environment (Lo [2002]). As the authors show in this article, the industry’s failure to take autocorrelation into account has produced estimates of equity volatility that are much lower than they should be, and estimates of CTA volatility that are much higher. Given the results reported in this article, an equity volatility of 16% really should be closer to 20%, and a CTA volatility of 10% should be closer to 6% or 7%.

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The Journal of Alternative Investments: 16 (1)
The Journal of Alternative Investments
Vol. 16, Issue 1
Summer 2013
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Autocorrelation Effects on CTA and Equity
Risk Measurement
Galen Burghardt, Lianyan Liu
The Journal of Alternative Investments Jun 2013, 16 (1) 19-42; DOI: 10.3905/jai.2013.16.1.019

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Autocorrelation Effects on CTA and Equity
Risk Measurement
Galen Burghardt, Lianyan Liu
The Journal of Alternative Investments Jun 2013, 16 (1) 19-42; DOI: 10.3905/jai.2013.16.1.019
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  • Article
    • Abstract
    • DRAWDOWN MODEL2
    • TWO EMPIRICAL PUZZLES
    • AUTOCORRELATION RESOLVES THE PUZZLES
    • THE SCANDAL OF THE SQUARE ROOT OF TIME RULE
    • FIRST PUZZLE RESOLVED
    • EXTENDING THE WORK TO A BROADER DATA SET
    • AUTOCORRELATION AND THE NEWEDGE TREND INDICATOR
    • THE QUESTION OF PERSISTENCE
    • WHY INVESTORS SHOULD CARE ABOUT AUTOCORRELATION
    • USING AUTOCORRELATION AS A DIAGNOSTIC
    • WHERE DO WE GO FROM HERE?
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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  • Editor’s Letter
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  • Practical Applications of Cryptocurrencies as an Asset Class? An Empirical Assessment
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