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Desmooth_AR1_rho

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Returns the de-smoothing parameter corresponding to the AR(1) de-smoothed (or ‘de-correlated) values of a series, as described in the book Extreme Events. This involves:

 

(a)    Postulating (for, say, a return series) that there is some underlying ‘true’ return series, , and that the observed series, , derives from it via a first order autoregressive model, ; and

 

(b)   Identifying the value of  (between 0 and 0.5) for which  has zero first order correlation (which implies that the covariance between  and  is zero.

 

The de-smoothed series, , can then be derived using the following formula, see MnDesmooth_AR1:

 

 

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