Why use autocorrelation instead of autocovariance when examining stationary time series?

Autocorrelation and autocovariance are one of the most critical metrics in financial time series econometrics. Both functions are based on covariance and correlation metrics.

What is Autocorrelation? Autocorrelation measures the degree of similarity between a given time series and the lagged version of that time series over successive time periods. It is similar to calculating the correlation between two different variables except in Autocorrelation we calculate the correlation between two different versions Xt and Xt-k of the same time series.

What is Autocovariance? Autocovariance is defined as the covariance between the present value (xt) with the previous value (xt-1) and the present value (xt) with (xt-2). And it is denoted as Î³. In a stationary time series, data are challenging and are likely to change considering the assumptions of linear programming. In such a situation, the residual errors can be correlated in order to eliminate inconsistency. When the autocovariance is utilized, its variables can change over time which can lead to invalid results.

In stationary time series, the statistical properties of the data do not change considerably over time. Hence autocorrelation will be much applicable when compared to autocovariance.