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Exercise

Are Interest Rates Autocorrelated?

When you look at daily changes in interest rates, the autocorrelation is close to zero. However, if you resample the data and look at annual changes, the autocorrelation is negative. This implies that while short term changes in interest rates may be uncorrelated, long term changes in interest rates are negatively autocorrelated. A daily move up or down in interest rates is unlikely to tell you anything about interest rates tomorrow, but a move in interest rates over a year can tell you something about where interest rates are going over the next year. And this makes some economic sense: over long horizons, when interest rates go up, the economy tends to slow down, which consequently causes interest rates to fall, and vice versa.

The DataFrame daily_rates contains daily data of 10-year interest rates from 1962 to 2017.

Instructions
100 XP
  • Create a new DataFrame, daily_diff, of changes in daily rates using the .diff() method.
  • Compute the autocorrelation of the column 'US10Y' in daily_diff using the .autocorr() method.
  • Use the .resample() method with arguments rule='A' to convert to annual frequency and how='last'.
    • The argument how in .resample() has been deprecated.
    • The new syntax .resample().last() also works.
  • Create a new DataFrame, yearly_diff of changes in annual rates and compute the autocorrelation, as above.