Have the Forex markets been efficient?
Market Correlations. FORTS Derivatives Market Diagnostics. September 2014
Written by Forex Automaton   
Tuesday, 07 October 2014 16:51

FORTS metaanalytics September 2014

Maraging Partners, a Moscow-based FX management advisory firm, continues publishing its monthly quantitative FORTS analysis. An English version is available at the link.

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TRY (Turkish Lira) intermarket correlation: USD/TRY follows EUR/JPY
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Written by Forex Automaton   
Friday, 11 January 2013 07:46

A time-integrated study of hourly time-scale lagged correlation between USD/TRY and EUR/JPY reveals hints of a correlation whereby EUR/JPY leads and TRY/USD follows with a lag on one hour.

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TRY intermarket correlation: USD/TRY follows AUD/JPY
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Written by Forex Automaton   
Tuesday, 11 December 2012 06:32

A time-integrated study of hourly time-scale lagged correlation between USD/TRY and AUD/JPY reveals a visible if not highly statistically significant correlation whereby AUD/JPY leads and TRY/USD follows with a lag on one hour.

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TRY intermarket correlation: USD/TRY follows AUD/USD
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Written by Forex Automaton   
Sunday, 23 September 2012 10:30

A time-integrated study of hourly time-scale lagged correlation between USD/TRY and AUD/USD reveals a statistically significant correlation whereby AUD/USD leads and TRY/USD follows with a lag on one hour.

Compared to the series of intermarket correlation reports generated in 2008-2009 (not covering Turkish Lira), the new reports adopt a somewhat different approach to statistical uncertainty estimation. Instead of synthesizing mock time series with the volatility distribution of the real ones, producing their autocorrelations, and inferring the uncertainty from a comparison of many such analyses, as was done in 2008-2009, I now infer the uncertainty of the autocorrelation coefficients directly as a standard deviation of the sum, knowing the terms entering the sum. As before, hourly data are used and the quantity correlated is hourly logarithmic return.

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TRY correlations review, 2010-2012
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Written by Forex Automaton   
Saturday, 25 August 2012 14:10

With this report, I begin a series of reports aiming to extend correlation analysis to a number of emerging currency pairs, such as Turkish Lira, never covered on this site up to now. Surprisingly for a currency pair with such a large interest rate differential, USD/TRY shows no signs of interesting autocorrelations in 2010-2012.

Technically, the new reports adopt a somewhat different approach to statistical uncertainty estimation. Instead of synthesizing mock time series with the volatility distribution of the real ones, producing their autocorrelations, and inferring the uncertainty from a comparison of many such analyses, as was done in 2008-2009, I now infer the uncertainty of the autocorrelation coefficients directly as a standard deviation of the sum, knowing the terms entering the sum. As before, hourly data are used.

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Foreign Exchange correlations and inefficiency update, July 2012
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Written by Forex Automaton   
Sunday, 22 July 2012 13:29

The first release of this study was published on this site in March 2012. Now, with four more data points and a new insight into the overall interpretation of the data, here is an update.

As a reminder, I monitor three quantities:

  • CERPI or the Currency Exchange Rate Predictability Index (CERPI 1H.1M to be exact)

  • CERCSI or the Currency Exchange Rate Correlation Strength Index (again, CERCSI 1H.1M to be exact)

  • the hourly logarithmic volatility (average of the square root of the zero lag peak value of the autocorrelation function of the logarithmic returns) over the 14 currency pairs

CERPI and CERCSI are defined elsewhere on this site. The volatility measure has just been defined.

CERPI measures the strength (by absolute value) of the 1-hour lagged Pearson correlation coefficients among the individual time series (intermarket correlations) as well as inside each time series (autocorrelations).

Benchmark level of CERPI

Due to finite measurement accuracy, CERPI can and will be non-zero even for perfectly efficient markets. As a non-negative quantity, CERPI is an average value statistic of an asymmetric distribution, describing an absolute value of the correlation coefficient corresponding to the time lag of one hour. The correlation coefficient is a random quantity which is equally likely to take both positive and negative values in the hypothetical case of efficient markets. The distribution of its absolute value can be approximately described as the right half of the typical bell-shaped Gaussian distribution whose sigma equals the measurement accuracy for a typical one-hour lag correlation, with zero being the left margin of the distribution. As figures in the Correlation Reports section indicate, this measurement accuracy appears to be about 0.05 (hourly data, a month of observation).

If we take a Gaussian with sigma s, mean 0 and cut it in two, leaving only the right part and renormalizing it, the resulting distribution will have mean of s (2/3.1415...)1/2 or about 0.8s. This means that the value of CERPI to expect from the perfectly efficient markets would be around 0.04.

Evolution of CERPI since 2003 1.1 Evolution of CERCSI since 2003 1.2 Evolution of FX volatility since 2003 1.3

Fig.1. Monthly data from 2003-2012, using the 14 currency exchange rates: AUD/JPY, AUD/USD, CHF/JPY, EUR/AUD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/USD, GBP/CHF, GBP/JPY, GBP/USD, USD/CAD, USD/CHF, USD/JPY. 1.1: evolution of CERPI 1H.1M, 1.2: evolution of CERCSI 1H.1M, 1.3: evolution of houly logarithmic volatility. In Fig. 1.3, the gray line shows the benchmark level of CERPI corresponding to hypothetical efficient markets. Source of data: ForexAutomaton monthly correlation analysis reports.

The time evolution plots of CERPI, CERCSI and volatility are shown in Fig.1.

Gray line in Fig.1.1 underscores the non-trivial information in CERPI: had the markets been efficient, the data would have been centered around the gray line. The data are considerably higher on average, arguably with a slight trend towards greater efficiency (lower CERPI) as time goes on.

Fig.1.2 indicates that in the past three months the markets have been moving into the zone of higher absolute value correlation, usually associated with periods of market panics. (Naturally, various pairs of market instruments are either positively or negatively correlated. By high "absolute value" correlation I mean that correlations in general grow in absolute value: the positive ones get more positive while the negative ones get more negative). Portfolio diversification breaks down as the universe of financial instruments degenerates into risky assets and safe haven ones. This degeneration, even though it may be linked with high volatility via investor psychology and via the mechanics of the overleveraged markets, does not follow from a rise in volatility mathematically, and represents an independent aspect in the quantitative description of the panic phenomenon.

Interestingly, the present values of CERCSI, historically high, are accompanied by moderate volatility.

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Does Forex evolve towards efficiency?
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Written by Forex Automaton   
Sunday, 25 March 2012 16:11

During the past 10 years, liquidity in the FX markets is known to have been growing. One might expect that various non-commercial participants, including those with capabilities to research, fund and execute systematic and algorithmic trading strategies, exhaust the alpha-generating potential of this market and drive it towards efficiency. Do spot foreign exchange markets really evolve towards efficiency? I use the ForexAutomaton CERPI 1H.1M inefficiency index (hourly scale, monthly data accumulation period) to look at the trend of the past 10 years (2003-2012), and compare the picture with that of the evolution in the instantaneous ("non-predictive") correlation strength (CERCSI, pronounced "Sir-see") and volatility.

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Introducing CERCSI, the correlation-based forex correlation strength index
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Written by Forex Automaton   
Saturday, 24 March 2012 11:16

  Currency Exchange Rate Correlation Strength Index (CERCSI) is a measure of zero-lag correlation strength with a specified timeframe (time scale) and measurement interval. For quantities we report regularly, measurement interval is the same as period of measurement. The quantities reported in the Forex Correlation Analysis Reports 1H.1M section of the site are measured monthly at the end of a month and include the whole month of data. This article defines the way CERCSI is constructed.

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Introducing CERPI, the correlation-based forex inefficiency index
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Written by Forex Automaton   
Saturday, 10 March 2012 15:39

Currency Exchange Rate Predictability Index (CERPI) is a measure of market inefficiency with a specified time frame (time scale) and measurement interval. For quantities we report regularly, measurement interval is the same as period of measurement. The quantities reported in the Forex Correlation Analysis Reports 1H.1M section of the site are measured monthly at the end of a month and include the whole month of data. This article defines the way CERPI is constructed.

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Heidi performance review
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Written by Forex Automaton   
Saturday, 21 January 2012 17:00

Data accumulation for the present incarnation of Heidi began on December 1, 2010 and the first predictions (in back-testing mode) were generated for March 16, 2011. The present system was announced and began live operation on May 23. Now, eight months later, I take a look at the first statistically significant performance figures of merit and make an adjustment to one of the system parameters.

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CAD and oil hour-scale correlation: it's safer to rely on CAD
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Written by Forex Automaton   
Wednesday, 14 October 2009 17:42

In the recent forex/CFD data, USD/CAD is negatively correlated with light oil (WTI) CFD. This is the same as saying that CAD, one of the commodity currencies, is positively correlated with oil. This is old news. In this article I take a deeper look at the issue and analyze the shape of the correlation peak. Analyzed on the hour time scale, the correlation peak is broad and somewhat asymmetric, indicating that it is much safer to rely on the guidance of USD/CAD in predicting the oil price, rather than other way round. The necessary caveat is that this is a time-integrated picture, covering a period from late August 2008.

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