When you’re building a portfolio or analysing an investment, you might focus on returns, risk, or volatility. But there’s another statistical concept quietly shaping outcomes: serial correlation. In 2025, as Australian markets respond to shifting economic cycles and regulatory changes, understanding serial correlations can give investors an edge—especially as AI-driven trading and algorithmic strategies become more common.

What Is Serial Correlation and Why Does It Matter?

Serial correlation (or autocorrelation) measures the relationship between a variable and a lagged version of itself over successive time intervals. In finance, it often refers to how today’s asset returns are linked to past returns. If returns are positively serially correlated, a positive return today increases the likelihood of a positive return tomorrow. If negative, the opposite tends to occur.

Positive serial correlation: Trends persist—momentum strategies may profit.
Negative serial correlation: Mean reversion—prices may snap back after moving too far.
No serial correlation: Returns are independent—markets behave randomly, as in the classic Efficient Market Hypothesis (EMH).

For investors, serial correlation can distort traditional risk measures like volatility, lead to over- or under-estimation of risk, and affect portfolio construction—especially in alternatives or illiquid asset classes.

Real-World Examples in the 2025 Australian Market

Let’s bring this concept closer to home with some practical scenarios:

ASX Shares: The ASX 200 has historically shown low serial correlation, but in times of crisis or exuberance (like the recent 2024 AI stock rally), serial correlation can spike as investor sentiment becomes self-reinforcing.
Property Funds: Unlisted property and infrastructure funds, popular with SMSFs, often exhibit positive serial correlation due to infrequent valuation updates. This means reported returns may understate true volatility.
Bond Markets: With the RBA’s 2025 rate policy shifting towards stability, government bond returns have shown a slight increase in serial correlation as markets anticipate and react to policy statements.

Serial correlations are especially relevant for investors using algorithmic trading, factor investing, or momentum-based strategies—which are gaining traction on Australian platforms as low-cost brokerage expands access.

How Serial Correlation Impacts Portfolio Strategies

Why should you care about serial correlation? It can have material impacts on how you measure risk, assess diversification, and choose investment strategies:

Risk Underestimation: If serial correlation is present, traditional volatility calculations (like standard deviation) may underestimate true risk. This is critical for compliance with APRA’s 2025 stress-testing guidelines for superannuation funds and managed portfolios.
Performance Chasing: Investors drawn to recent winners may fall into the trap of assuming trends will persist, when in reality, serial correlation can reverse suddenly—particularly in speculative sectors.
Backtesting Pitfalls: Many robo-advisors and quantitative funds backtest strategies on historical data. Ignoring serial correlation can lead to overoptimistic projections of performance and understate drawdowns.

It’s also worth noting that regulatory updates in 2025 have pushed managed funds to disclose more about their risk modelling, including how they address autocorrelation in illiquid assets. This can help retail investors make more informed decisions, particularly as alternative assets become mainstream in diversified portfolios.

Best Practices for Aussie Investors in 2025

Check Fund Disclosures: Look for notes on how managers address serial correlation in risk reports, especially for unlisted or illiquid funds.
Adjust Your Risk Expectations: When analysing historical returns, consider whether the reported volatility matches the true underlying risk.
Be Wary of Overfitting: If you use automated or backtested strategies, ensure they account for serial correlation, especially in short look-back periods or niche asset classes.
Stay Informed: Track RBA updates, ASIC guidance, and market research on changing correlations—especially as AI and high-frequency trading evolve the landscape in 2025.