Conditional correlation estimation and serial dependence identification

Abstract: It has been recently shown in Jaworski, P., Jelito, D. and Pitera, M. (2024), 'A note on the equivalence between the conditional uncorrelation and the independence of random variables', Electronic Journal of Statistics 18(1), that one can characterise the independence of random variables via the family of conditional correlations on quantile-induced sets. This effectively shows that the localized linear measure of dependence is able to detect any form of nonlinear dependence for appropriately chosen conditioning sets. In this paper, we expand this concept, focusing on the statistical properties of conditional correlation estimators and their potential usage in serial dependence identification. In particular, we show how to estimate conditional correlations in generic and serial dependence setups, discuss key properties of the related estimators, define the conditional equivalent of the autocorrelation function, and provide a series of examples which prove that the proposed framework could be efficiently used in many practical econometric applications.