Correlation Flashcards
What is the mean?
The statistical term for average - indicates the central tendency of the distribution
What is standard deviation?
A common measure of dispersion
What does skewness measure?
The extent to which a distribution is not symmetric about its mean value
What does kurtosis measure?
How fat the tails of the distribution are
What does the Jarque-Beta test (JC) test?
Whether the same data has the skewness and kurtosis matching the normal distribution
What is variance?
Indicates the width of the deviation
What does correlation measure?
Numerically the relationship between two variables X and Y
POC - what does r (or rxy) lie between?
-1 and +1
POC - what does positive values of r indicate?
Positive correlation between X and Y
POC - what does negative values of r indicate?
Negative correlation between X and Y
POC - what does an r or 0 imply?
X and Y are uncorrelated
POC - what do larger positive values of r indicate?
Stronger positive correlation
POC - what does r=1 indicate?
Perfect positive correlation
POC - what do more negative values of r indicate?
Negative correlation
POC - what does r=-1 indicate?
Perfect negative correlation
POC - the correlation between Y and X is the same as what?
The correlation between X and Y
POC - What is the correlation between any variable and itself?
1
What does the magnitude of r mean?
It measures the proportion of the variation in X that matches up with the variance of Y
Does correlation imply causality?
Not necessarily. It can be very suggestive, but cannot on their own establish correlation. Correlation plus a sensible theory suggests causality, but does not prove it
The correlation between workers’ education levels and wages is strongly positive. Does this mean education ‘causes’ higher wages?
We cant know for sure. 1) Education improves skills and more skilled workers get better paying jobs. Education causes wages to increase. 2) Individuals are born with quality A which is relevant for success in education and on the job. Quality A (NOT education) causes wages to increase
Where are logarithmic transformations often used?
In finance and economics
What is the base X or a logarithm?
Usually 10 or e since both are available on the calculator
What ways can we convert raw prices into a series of returns?
Using simple returns or logarithmic returns
What is simple returns?
Where Rt denotes return at time t, pt denotes the asset price at time t, (often x 100%)
What is logarithmic returns?
Where Rt denotes at time t, pt denotes the asset price at time t, and ln denotes the natural logarithm (often x 100%)
Give some examples or correlation
When the weather is good outside, ice cream consumption increase. Class attendance = good exam results
