Have the Forex markets been efficient?
EUR/USD and USD/JPY 2002-2008: intermarket correlations (leader-follower)
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Written by Forex Automaton   
Thursday, 29 May 2008 15:07

Euro / US Dollar and US Dollar / Yen are obviously anticorrelated currency pairs. But, which one is the leader and which one is the follower? How long do the markets take to work out the anticorrelation? If the adjustment is not instantaneous, can one currency be used to predict the other?

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EUR/JPY 2002-2008: predictability overview
Written by Forex Automaton   
Tuesday, 27 May 2008 13:30

With the basic two-point correlation approach to the Euro / Japanese Yen currency pair we see the asymmetry between the bullish and bearish trends reflecting the interest rate differential, like in most other currency pairs, and the 24-hour oscillation of activity.

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Why "bullish" and "bearish" autocorrelations
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Written by Forex Automaton   
Tuesday, 27 May 2008 08:31

Here are some further thoughts on the "bearish" and "bullish" autocorrelations.

  1. This is not, strictly speaking, a prediction tool because such representation of the data omits one important aspect of the picture -- probability of trend reversals. The full two-point set can be split into subset of

    1. "bull-bull",
    2. "bear-bear" but also
    3. "bull-bear" and
    4. "bear-bull" autocorrelations.
    I call a and b "trend following" and c,d "trend reversal" autocorrelations.
  2. The latter two also have the 24-hour cycle pattern which when combined with that of the "bull-bull" and "bear-bear", gives the resulting, much more flat, full autocorrelation. For qualitative understanding, one can look at the total autocorrelation and either a,b or c,d since a,b can be deduced given the total and c,d. Likewise, c,d can be deduced given the total and a,b.

  3. The separation of "bullish" and "bearish" autocorrelations does reveal two important time scales which would otherwise remain hidden in the total autocorrelation: the 24-hour time scale and the less trivial "market memory" time scale.

  4. The separation of the "trend following" autocorrelations reveals the trend asymmetry associated with the interest rate differential. One can tell which currency of the pair has a higher interest rate by comparing the two "trend following" autocorrelations. I argue that this is an indication of a market inefficiency but it remains to be demonstrated that such an asymmetry can be reliably exploited to generate speculative profit.

  5. One can argue that once "inside" a long time trend, the relevant trend-following autocorrelation approaches the "total". But if you know a priori what is and what is not a trend, that may be all you need.

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EUR/GBP 2002-2008: predictability overview
Written by Forex Automaton   
Monday, 26 May 2008 15:44

From the point of view of two-point correlation analysis, the Euro / Pound Sterling exchange rate shows patterns which look similar to EUR/AUD.

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EUR/CHF 2002-2008: predictability overview
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Written by Forex Automaton   
Friday, 23 May 2008 10:54

The Euro / Swiss Franc in 2002-2008 is a currency pair with relatively low volatility. In the medium term (days and weeks), dynamics of EUR/CHF is visibly more random than one would expect on the basis of its long range behaviour -- a feature not seen with more volatile currency pairs before.

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EUR/AUD 2002-2008: specific patterns of trading sessions
Written by Forex Automaton   
Thursday, 22 May 2008 15:26

This article develops one of the themes in the EUR/AUD predictability overview, namely that of the daily cyclic pattern of market action. We analyze the patterns time zone by time zone -- with curious insights into market dynamics.

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EUR/AUD 2002-2008: predictability overview
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Written by Forex Automaton   
Tuesday, 20 May 2008 12:03

The Euro / Australian Dollar in 2002-2008 is a nice, textbook-clear case demonstrating what kinds of stable patterns one may expect in the currency markets, although none of the patterns seen with the two-point correlation analysis are unique to this currency pair.

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CHF/JPY 2002-2008: predictability overview
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Written by Forex Automaton   
Thursday, 15 May 2008 11:16

The Swiss Franc / Japanese Yen in 2002-2008 has been showing a "contrarian" trend reversal tendency in addition to the trend repetition signal with a 24-hour-multiple time lag seen in most other currency pairs.

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GBP/USD 2002-2008: predictability overview
Written by Forex Automaton   
Tuesday, 13 May 2008 09:56

The US Dollar / Pound Sterling currency pair does not show much predictability from the point of view of basic two-point correlation approach adopted in these series of articles, besides the trend repetition signal with a 24-hour-multiple time lag seen in most other currency pairs.

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USD/CAD 2002-2008: predictability overview
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Written by Forex Automaton   
Thursday, 08 May 2008 10:40

The US Dollar/Canadian Dollar currency pair demonstrates some of the strongest cyclic patterns we've seen in the forex markets reviewed so far. This market must be an Elliott wave analyst's delight, at least on the time scales of several days.

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USD/JPY 2002-2008: predictability overview
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Written by Forex Automaton   
Wednesday, 07 May 2008 13:49

The US Dollar/Yen currency pair is another case of a relatively efficient market. While there are hints of non-trivial correlations, these remain hints and not reliable signals one could use for forecasting -- at least not with the basic two-point correlation approach we stick with in this series of articles.

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