The covariance between two random variables X and Y is a measure of how much X and Y vary together. It is defined as the expected value of the product of the deviations of X and Y from their means. Covariance is used to measure linear dependence between variables. While uncorrelated variables are linearly independent, independence requires that covariance equals zero. Covariance satisfies properties similar to an inner product and can be calculated from sample data to estimate population covariance. Covariance is important in fields like genetics, finance, and meteorology.
The covariance between two random variables X and Y is a measure of how much X and Y vary together. It is defined as the expected value of the product of the deviations of X and Y from their means. Covariance is used to measure linear dependence between variables. While uncorrelated variables are linearly independent, independence requires that covariance equals zero. Covariance satisfies properties similar to an inner product and can be calculated from sample data to estimate population covariance. Covariance is important in fields like genetics, finance, and meteorology.
The covariance between two random variables X and Y is a measure of how much X and Y vary together. It is defined as the expected value of the product of the deviations of X and Y from their means. Covariance is used to measure linear dependence between variables. While uncorrelated variables are linearly independent, independence requires that covariance equals zero. Covariance satisfies properties similar to an inner product and can be calculated from sample data to estimate population covariance. Covariance is important in fields like genetics, finance, and meteorology.
The covariance between two random variables X and Y is a measure of how much X and Y vary together. It is defined as the expected value of the product of the deviations of X and Y from their means. Covariance is used to measure linear dependence between variables. While uncorrelated variables are linearly independent, independence requires that covariance equals zero. Covariance satisfies properties similar to an inner product and can be calculated from sample data to estimate population covariance. Covariance is important in fields like genetics, finance, and meteorology.
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Definition[edit]
The covariance between two jointly distributed real-valued random
variables X and Y with finite second moments is defined[2] as
where E[X] is the expected value of X, also known as the mean of X. By using the linearity property of expectations, this can be simplified to
However, when , this last equation is prone to catastrophic cancellation when computed with floating point arithmetic and thus should be avoided in computer programs when the data have not been centered before. [3] For random vectors and (both of dimension m) the mm cross covariance matrix (also known as dispersion matrix or variancecovariance matrix,[4] or simply calledcovariance matrix) is equal to
where mT is the transpose of the vector (or matrix) m.
The (i,j)-th element of this matrix is equal to the covariance Cov(Xi, Yj) between the i-th scalar component of X and the j-th scalar component of Y. In particular, Cov(Y, X) is the transpose of Cov(X, Y). For a vector of m jointly distributed random variables with finite second moments, its covariance matrix is defined as
Random variables whose covariance is zero are called uncorrelated.
The units of measurement of the covariance Cov(X, Y) are those of X times those of Y. By contrast, correlation coefficients, which depend on the covariance, are adimensionless measure of linear dependence. (In fact, correlation coefficients can simply be understood as a normalized version of covariance.)
Properties[edit]
Variance is a special case of the covariance when the two variables are identical:
If X, Y, W, and V are real-valued random variables and a, b, c, d are constant
("constant" in this context means non-random), then the following facts are a consequence of the definition of covariance:
For a sequence X1, ..., Xn of random variables, and constants a1, ..., an, we have
A more general identity for covariance matrices[edit]
Let
be a random vector with covariance matrix
can act on
. The covariance matrix of the vector
, and let
be a matrix that
is:
. This is a direct result of the linearity of expectation and is useful when applying a linear transformation, such as a whitening transformation, to a vector. Uncorrelatedness and independence[edit] If X and Y are independent, then their covariance is zero. This follows because under independence,
The converse, however, is not generally true. For example, let X be uniformly distributed in [-1, 1] and let Y = X2. Clearly, X and Y are dependent, but
In this case, the relationship between Y and X is non-linear, while correlation and covariance are measures of linear dependence between two variables. This example shows that if two variables are uncorrelated, that does not in general imply that they are independent. However, if two variables are jointly normally distributed (but not if they are merely individually normally distributed), uncorrelatedness does imply independence. Relationship to inner products[edit] Many of the properties of covariance can be extracted elegantly by observing that it satisfies similar properties to those of an inner product: 1. bilinear: for constants a and b and random variables X, Y, Z, (aX + bY, Z) = a (X, Z) + b (Y, Z); 2. symmetric: (X, Y) = (Y, X); 3. positive semi-definite: 2(X) = (X, X) 0 for all random variables X, and (X, X) = 0 implies that X is a constant random variable (K). In fact these properties imply that the covariance defines an inner product over the quotient vector space obtained by taking the subspace of random variables with finite second moment and identifying any two that differ by a constant. (This identification turns the positive semi-definiteness above into positive definiteness.) That quotient vector space is isomorphic to the subspace of random variables with finite second moment and mean zero; on that subspace, the covariance is exactly the L2 inner product of real-valued functions on the sample space. As a result for random variables with finite variance, the inequality
holds via the CauchySchwarz inequality.
Proof: If 2(Y) = 0, then it holds trivially. Otherwise, let random variable
Then we have
Calculating the sample covariance[edit]
Main article: Sample mean and sample covariance The sample covariance of N observations of K variables is the K-byK matrix
with the entries
, which is an estimate of the covariance between variable j and variable k. The sample mean and the sample covariance matrix are unbiased estimates of the mean and the covariance matrix of the random vector , a row vector whose jth element (j = 1, ..., K) is one of the random variables. The reason the sample covariance matrix has in the denominator rather than is essentially that the population mean sample mean . If the population mean estimate is given by
is not known and is replaced by the
is known, the analogous unbiased
Comments[edit] The covariance is sometimes called a measure of "linear dependence" between the two random variables. That does not mean the same thing as in the context of linear algebra (see linear dependence). When the covariance is normalized, one obtains the correlation coefficient. From it, one can obtain the Pearson coefficient, which gives the goodness of the fit for the best possible linear function describing the relation between the variables. In this sense covariance is a linear gauge of dependence. Applications[edit]
In genetics and molecular biology[edit]
Covariance is an important measure in biology. Certain sequences of DNA are conserved more than others among species, and thus to study secondary and tertiary structures of proteins, or of RNA structures, sequences are compared in closely related species. If sequence changes are found or no changes at all are found in noncoding RNA (such as microRNA), sequences are found to be necessary for common structural motifs, such as an RNA loop. In financial economics[edit] Covariances play a key role in financial economics, especially in portfolio theory and in the capital asset pricing model. Covariances among various assets' returns are used to determine, under certain assumptions, the relative amounts of different assets that investors should (in a normative analysis) or are predicted to (in a positive analysis) choose to hold in a context of diversification. In meteorological data assimilation[edit] The covariance matrix is important in estimating the initial conditions required for running weather forecast models.
