Have the Forex markets been efficient?
Forex scalping: AUD/JPY under the microscope
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Written by Forex Automaton   
Thursday, 26 March 2009 10:08

I analyze the correlation structure of AUD/JPY on the time scales between 10 minutes and 10 seconds and see dramatic differences between the real market and the efficient market expectations on the one hand and among the time scales of the real market, on the other. High frequency data are particularly puzzling. Are we looking at the traces left by algo trading in large volumes? The study uses AUD/JPY time series of about 10,000 data points each, obtained from a popular provider (an ECN broker).

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GBP/USD and USD/CHF 2004-2008: symmetric predictive correlation
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Written by Forex Automaton   
Wednesday, 07 January 2009 15:29

The negative correlation peak of Pound Sterling/US Dollar and US Dollar/Swiss Franc, when studied with hour time scale resulution, looks symmetric and wider than one bin. Therefore, either exchange rate may have predictive influence on the other. Of course, this is a time-integrated picture and the time evolution may have more complex structure: the symmetric peak may be composed out of a number of asymmetric ones.

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GBP/JPY and USD/CHF 2004-2008: weak correlation, no forecasting potential
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Written by Forex Automaton   
Tuesday, 06 January 2009 12:57

Pound Sterling/Japanese Yen is weakly positively correlated with US Dollar/Swiss Franc and, what is an independent piece of information, predictive correlations seem absent in this pair of exchange rates with this (hour time scale) resolution. The necessary caveat is that this is a time-integrated picture.

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EUR/JPY and USD/CHF 2004-2008: EUR/JPY is the leader.
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Written by Forex Automaton   
Tuesday, 30 December 2008 15:30

The two exchange rates with the same sign of the interest rate differential, Euro/Japanese Yen and US Dollar/ Swiss Franc turn out to be negatively correlated. Studied on the hour time scale, the correlation looks highly asymmetric, making EUR/JPY look like the leader and CHF/USD (not USD/CHF, due to the negativeness of the correlation) -- the follower. The necessary caveat is that this is a time-integrated picture.

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EUR/GBP and USD/CHF 2004-2008: "trivial" intermarket correlation
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Written by Forex Automaton   
Monday, 29 December 2008 15:44

The two exchange rates with the opposite signs of the interest rate differential, Euro/Pound Sterling and US Dollar/ Swiss Franc and negatively correlated. The correlation, when studied on the hour time scale, seems too tight to offer forecasting potential. Such simple one-peak structures centered at the zero time-lag are called "trivial correlations" in this series of analysis notes. The necessary caveat is that this is a time-integrated picture.

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EUR/AUD and USD/CHF 2004-2008: "trivial" intermarket correlations
Written by Forex Automaton   
Wednesday, 17 December 2008 14:04

The two exchange rates with the opposite signs of the interest rate differential, Euro/ Australian Dollar and US Dollar/ Swiss Franc and negatively correlated. The correlation, when studied on the hour time scale, seems too tight to offer forecasting potential. Such simple one-peak structures centered at the zero time-lag are called "trivial correlations" in this series of analysis notes. The necessary caveat is that this is time-integrated picture.

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CHF/JPY and USD/CHF intermarket correlations, 2004-2008. CHF/JPY is the leader.
Written by Forex Automaton   
Monday, 15 December 2008 12:46

Swiss Franc/Japanese Yen and US Dollar/Swiss Franc and negatively correlated, apparently due to the presense of CHF in both exchange rates in the opposite capacities. USD-CHF LIBOR interest rate differential stood much higher than that of CHF-JPY throughout most of the period under study, getting as high as 400 points before touching 0 in Summer 2008. Strangely, on the hour scale, it is CHF/JPY that's the leader in the pair, with CHF/USD being the follower -- at least such is the time-averaged picture which definitely deserves a detailed study of its time evolution.

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AUD/USD and USD/CHF intermarket correlations, 2004-2008
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Written by Forex Automaton   
Tuesday, 09 December 2008 15:13

Even though both interest rate differentials, that of AUD with respect to USD and USD with respect to CHF, have been fairly large and positive, the Australian Dollar/US Dollar and US Dollar/Swiss Franc and negatively correlated, apparently due to the presense of USD in both exchange rates in the opposite capacities. When studied with one hour time lag bin, the correlation deep looks broader than one bin (except for the American trading hours). This means that either exchange rate could be in principle used to statistically foretell the other -- with the usual caveat that this is a time-integrated picture. As a function of the time lag, the correlation appears somewhat asymmetric giving AUD/USD a slight preference in terms of "leadership".

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AUD/JPY and USD/CHF intermarket correlation, 2004-2008.
Written by Forex Automaton   
Monday, 08 December 2008 13:27

The intermarket correlation between Australian Dollar/Japanese Yen and US Dollar/Swiss Franc does not exist in Asia-Pacific trading and is extremely week the rest of time. However, there is a hint of a delayed correlation at one hour lag, whereby USD/CHF would be leading and AUD/JPY -- following. Given the interest rates, this observation goes against the hypothesis that the stronger interest rate differential should be the leader. The AUD/JPY and USD/CHF combination resembles AUD/JPY and EUR/GBP where similarly week delayed correlation signaled statistical lagging of AUD/JPY behind GBP/EUR.

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EUR/CHF and USD/CHF 2004-2008: "trivial" intermarket correlation
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Written by Forex Automaton   
Tuesday, 25 November 2008 18:03

The intermarket correlation between Euro/ Swiss Franc and US Dollar/Swiss Franc has a narrow positive peak at the zero time lag whose internal structure can not be resolved on the hour time scale -- simply put, these currencies are correlated positively with fast enough response to one another, and their combination offers no visible benefit for forecasting.

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EUR/GBP and USD/CAD 2002-2008: intermarket correlations
Written by Forex Automaton   
Monday, 13 October 2008 11:22

The intermarket correlation between Euro/Pound Sterling and US Dollar/Canadian Dollar has a narrow, relatively week negative peak at the zero time lag whose internal structure can not be resolved on the hour time scale -- simply put, these currencies are weakly negatively correlated with fast enough response to one another. Another feature is common to many cross-correlations involving EUR/GBP: this European pair seems to "listen" to what happened with various other pairs -- USD/CAD in this case -- in the American trading late the previous day, and "take a note". The evidence of this behaviour is fairly weak in every individual case, but becomes significant for forex collectively. Of course the direction of response EUR/GBP shows varies for each individual intermarket combination.

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