{"id":2090593,"date":"2018-10-29T18:18:34","date_gmt":"2018-10-29T12:48:34","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=2090593"},"modified":"2018-10-30T14:19:40","modified_gmt":"2018-10-30T08:49:40","slug":"macro-nifty-vs-inr-oil-correlation-part-ii","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2018\/10\/29\/macro-nifty-vs-inr-oil-correlation-part-ii\/","title":{"rendered":"Macro: NIFTY vs. INR\/OIL Correlation, Part II"},"content":{"rendered":"

This is a continuation of the correlation study of Part I<\/a><\/small><\/em>
\nOur correlation study showed a -0.54 between NIFTY 50 and USDINR whereas a 0.21 with OIL. Here, we will use weekly returns of the NIFTY and USDINR to build a simple linear model.<\/p>\n

Building a linear model<\/h3>\n

A weak correlation doesn’t usually lend itself to a useful linear model. To illustrate this point, have a look at the diagnostics below:
\n\"NIFTY~INR<\/a>
\nIdeally, the ‘Residuals vs. Fitted’ plot should show residuals evenly distributed around the zero line – it doesn’t. The Q-Q plot should lie on the diagonal – it is marred by heavy tails. Hence, we should scale-down our expectations from the model. <\/p>\n

For this post, we will split the time-series that we have into a “training set” that goes from 2010-01-01 to 2015-12-31 and a “test set” that goes from 2016-01-01 to 2018-09-30. We will build the model with the former and test it with the latter.<\/p>\n

Results<\/h3>\n

Predicted vs. actual weekly NIFTY 50 returns:
\n\"actual.vs.pred.NIFTY50\"<\/a>
\nTo test our model, we will give it the actual NIFTY 50 returns (x-axis) and plot the predict NIFTY 50 returns (y-axis.) The problem here is immediately apparent: it is heavily bullish! It consistently gives a positive prediction. <\/p>\n

Long and Long-short cumulative returns:
\n\"linear.model.cumulative.NIFTY50\"<\/a>
\nIf we use our model to go long-only (L) or long-short (LS), we get the cumulative returns shown above. The model is no better than buy-and-hold (at least it is no worse, so there is that.)<\/p>\n

Take-away<\/h3>\n

A weak correlation between NIFTY 50 and USDINR is not much to work with and a linear model built over that relationship is no better than buy-and-hold. Given the narrative spun by the media, it is tough to wrap ones head around the results above. <\/p>\n

We conclude with density charts of weekly NIFTY returns under different USDINR return thresholds in Part III<\/a>.<\/p>\n

Code and charts on github<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

This is a continuation of the correlation study of Part I Our correlation study showed a -0.54 between NIFTY 50 and USDINR whereas a 0.21 with OIL. Here, we will use weekly returns of the NIFTY and USDINR to build a simple linear model. Building a linear model A weak correlation doesn’t usually lend itself … <\/p>\n","protected":false},"author":2,"featured_media":2066301,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[954,3481,3391],"class_list":["post-2090593","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-correlation","tag-macro","tag-nifty","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2090593","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=2090593"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2090593\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2066301"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=2090593"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=2090593"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=2090593"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}