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I'm analyzing stock prices and I don't understand the purpose of leading and lagging. Can you suggest explain why we use them and how they might help to analyze stock prices?

Silverfish
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Hans
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  • You may find this post interesting: http://stats.stackexchange.com/questions/4200/using-lead-lag-relationships-for-time-series-prediction – Alex Woolford Oct 28 '14 at 05:12

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The most basic analysis for lead and lag is the correlation and cross-correlation analysis:

http://en.wikipedia.org/wiki/Cross-correlation

http://en.wikipedia.org/wiki/Correlation_and_dependence

Leads and lags are basically factors which show a similar pattern as the variable under consideration but are time shifted. For example: if the price of apples increases, it will increase the price of apple pudding. The price of apples is a lead factor of the price of pudding.

Silverfish
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show_stopper
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Assuming the lag is the DEPENDENT variable:

The first difference of a time series is defined by: $$ \Delta Y_t = Y_t-LY_t=Y_t-Y_{t-1} $$

This means when the lag $L$ or order $i$ is applied, you get an $i^{th}$ order lag of the random variable $Y$.

The purpose of this $i^{th}$ differenced series is to remove a time-varying mean. The new series will have a mean that is constant across time period $T$.

Intuitively, it gives a simple way to control for historical factors that could directly impact your dependent variable at the current time period $t$.

By this, you should be able to intuit your way through and realize that lead is just the converse to this (Assuming you have full data).

alpha
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