Forex Automaton

Australian Dollar/Japanese Yen and Swiss Franc/Japanese Yen are correlated currency pairs. For the period under study, the correlation is limited to the 1-hour wide 0 time-lag bin. Therefore this study does not reveal a stable pattern suitable for intermarket-correlation-based trading.

Fig.1 and Table 1 show that the volatilities of AUD/JPY and CHF/JPY differ considerably. Volatilities of both exchange rates vary little with trading time zone (session). As always in forex, the distributions of logarithmic returns are not "bell-shaped", are strongly non-Gaussian. The distributions look roughly triangular on the log scale. Therefore a lot more appropriate model for the tails would be an exponent, meaning the returns themselves (not the logarithms) follow a power law. An option buyer armed with the right pricing formula could capitalize on the fat tails (provided that they persist on the time scales of interest to such a trader) but one would not be able to make forecasts based on Fig.1.

AUD/JPY and CHF/JPY are significantly correlated on average for the period.

The fact that most of the correlation is concentrated at the 0 lag means that the correlation (reported in the table) works out mostly on the time scale of up to 1 hour. For the purpose of forex trading system development, correlations with non-zero time lag would be of particular importance. It is these correlations that allow us to make forecasts. Ability to detect them depends, among other things, on the time scale of the analysis (minute-by-minute, hour, day and so on) and signal to noise ratio. Alas, Fig.2 and Fig.3 (European session compared with martingale noise) present no indication of such correlations for this currency pair combination, given the level of uncertainty represented by the red band. The conclusion is dependent on the scale of the analysis used, this is the conclusion for the one-hour bin.

The data used are from the period 2002-08-20 00:00:00 to 2008-02-01 00:00:00.

Bookmark with: