Serial Autocorrelation: When Today's Return Predicts Tomorrow's
One of the core assumptions behind most of quantitative finance is that stock returns are independent. What happened yesterday tells you nothing about today. The stock went up ten days in a row? Irrelevant. Tomorrow is a fresh coin toss. But is this really true? Chapter 65 of Wilmott’s book looks at the evidence for serial autocorrelation in stock returns and asks what happens to our models when returns are not independent.