The Truth about SPY Time Series Data
Which of the following is true: A. The time series of SPY prices is (approximately) covariance stationary. B. The time series of SPY returns is (approximately) covariance stationary. C. The time series of SPY prices has an autocorrelation close to 0. D. The time series of SPY returns has an autocorrelation close to 1.
The correct answer is B. The time series of SPY returns is (approximately) covariance stationary.
Understanding SPY Time Series Data
Covariance Stationary and SPY Returns
Covariance stationary refers to a time series where the mean, variance, and covariance between observations do not change over time. In the case of the SPY returns, it is more likely to exhibit covariance stationary characteristics compared to the prices.
About SPY ETF
SPY is an exchange-traded fund (ETF) that tracks the performance of the S&P 500 Index, representing a basket of large-cap U.S. stocks. While the prices of SPY can be influenced by factors such as dividends, stock splits, and other corporate actions, the returns of SPY focus on the percentage change in the price over a given period.
Benefits of Using Returns
Returns are often used in financial analysis because they help eliminate the impact of factors that affect prices but are unrelated to the underlying asset's fundamental value. By focusing on the percentage change, returns are more likely to exhibit covariance stationary characteristics, making them a better choice for statistical analysis.
Price vs. Returns Analysis
In contrast, prices can exhibit non-stationary behavior due to factors such as inflation, economic cycles, and other market dynamics. These factors can cause the mean and variance of prices to change over time, making it less suitable for statistical analysis.
Conclusion
Therefore, when considering the properties of covariance stationary and the nature of the SPY ETF, the time series of SPY returns is more likely to exhibit covariance stationary characteristics compared to the prices.
In summary, the correct answer is B. The time series of SPY returns is (approximately) covariance stationary.