Forex Automaton

Like the Danish Krone, the Swedish Krona LIBOR has been mostly rising during the period under study. Motivation for publishing LIBOR correlation analysis on a forex trading system site has been outlined in the USD LIBOR analysis. This document begins with historical LIBOR charts for the currency, continues with volatility analysis, and culminates with autocorrelations and correlations of logarithmic returns for various SEK LIBOR terms. The main predictive patterns in SEK LIBOR are broad correlation peak around zero time lag, whose width varies with maturity, and periodic (wave-like) oscillations. The data cover the period from February 2006 up to December 2008.

Among the other LIBOR rates, the Danish Krone LIBOR is remarkable for its positive autocorrelations, peculiar and very strongly pronounced short-range pattern of the overnight interest rate, and the weakness of the correlation between different duration terms. Like the previous LIBOR predictability overviews, this document begins with historical LIBOR charts for the currency, continues with volatility analysis, and culminates with autocorrelations and correlations of logarithmic returns for various DKK LIBOR terms. As with many other currencies, the predictable patterns in DKK LIBOR evolve with loan duration term from short-range but strong and regular oscillation in the overnight through smooth waves in 3-month and into relative featurelessness of the 12-month LIBOR. Motivation for publishing this type of study on a forex trading system site has been outlined in the USD LIBOR analysis. Here I can only add that for a student of financial correlations, LIBOR is a nice real-life intuition-building tool, for the correlations are so strong you can learn to identidy features in the charts with features in the correlations visually.

Like the previous LIBOR predictability overviews, this document begins with historical LIBOR charts for the Canadian Dollar, continues with volatility analysis, and culminates with autocorrelations and correlations of logarithmic returns for various CAD LIBOR terms. 1-week LIBOR shows wave-like correlation pattern with a period of about 30 days on top of a positive autocorrelation. As the loan duration gets longer, the wave disappers and a more uniform positive autocorrelation emerges for the range of time lags of up to 70 days. That gets reduced to a 2-3 days wide peak around zero time lag for 12-month LIBOR. Cross-correlations between different LIBOR terms show srong predictability of the shorter range LIBOR on the basis of longer range. Motivation for this type of study has been outlined in the USD LIBOR analysis.

Like the previous LIBOR predictability overviews, this document begins with historical LIBOR charts for the Australian Dollar, continues with volatility analysis, and culminates with autocorrelations and correlations of various LIBOR terms. You will see that predictable patterns in AUD LIBORs are quite unique. Autocorrelations of short-term LIBORs show oscillations with about 7-8 day pediod, similar to USD but localized in the short range lags. For 3-month, 6-month and 12-month terms, broad (a few days) correlation peaks around 0 time lag are seen. For 3-month and 6-month LIBORs, the correlation is seen to be overall positive for the range of lags up to 70 or 80 days.

I've outlined the original motivation to study historical LIBOR data from predictability point of view in the USD LIBOR article. I continue with the logarithmic returns technique that proved useful in forex. Like the previous reports, this document begins with historical LIBOR charts for the Swiss Franc, continues with volatility analysis, and culminates with autocorrelations and correlations. You will see that predictable patterns in CHF LIBORs vary with duration term. Autocorrelations of short-term LIBORs show fast (about 4-day period) oscillation. For 3-month and 6-month terms, the main correlation pattern does not develop 70-day period waves on top of positive background, in contrast to USD and EUR LIBORs, but keeps oscillating between positive and negative autocorrelation values, with the oscillation period longer than that of the shorter terms. The autocorrelation of 12-month LIBOR remains similar to 6-month instead of becoming more uniformly positive as it does for JPY or more jittery as it does for USD, EUR and GBP.

The original motivation for the technical, mostly correlation-based study of LIBORs was outlined in the USD LIBOR article. Like the USD, EUR and JPY LIBOR reports, this document begins with historical LIBOR charts for the Pound Sterling, continues with volatility analysis, and culminates with correlations of logarithmic returns in GBP LIBOR. You will see that predictable patterns in GBP LIBORs show great variation with loan term. Autocorrelations of short-term LIBORs look jittery on the next-day time scale. Autocorrelations of short term (s/n-o/n and 1-week) LIBOR exhibit the now familiar "bipolar disorder" pattern with the characteristic time period of no more than 2-3 days. The smooth wave-like patterns of intermediate term USD and EUR LIBORs, about 70 days in period, are also found in GBP. As the term duration increases, the main correlation pattern becomes that of predictive (non-zero time lag) positive correlation between different maturity terms as well as inside individual time series (autocorrelation).

The original motivation for the technical, mostly correlation-based study of LIBORs was outlined in the USD LIBOR article. After looking at LIBROs for a few currencies, there seems to be more interesting stuff than just the role of LIBORs in controlling the pecking order among the currencies, as you might suspect off the bat. What emerges is the picture of LIBOR action evolving through bursts of volatility. With the intrinsic volatility of LIBORs being higher than that of currencies on the same time scale, the problem of risk, certainly better recognized than that of predictability (recall that the main subject of this research, forex predictability, is "not supposed" to exist in liquid markets), may indeed take the front row sit at the LIBOR show. Perhaps, predictability of risk is a good phrase to discuss the subject matter at hand. Like the USD and EUR LIBOR reports, this document begins with historical LIBOR charts for the Japanese Yen, continues with volatility analysis, and culminates with correlations of logarithmic returns in JPY LIBOR.

The motivation for the technical, mostly correlation-based study of LIBORs was outlined in the USD LIBOR article. Forex correlation analysis made me believe that LIBORs are important for speculative forex forecasting. From a more academic standpoint, it is interesting to hone one's analytic skills by expanding the range of application of the correlation techniques which yield intriguing results in forex to what's behind the forex movements, namely to the interest rates. I've structured this document to begin with historical LIBOR charts for Euro, continue with volatility analysis, culminate with LIBOR autocorrelations which is my prime tool of predictability analysis and conclude with cross-correlations among Euro LIBORs of different maturity terms.

This article begins a series of analysis reports investigating a degree of predictability in the LIBOR rates, a popular capital cost indicator. The analysis is based on historical LIBOR interest rate data released by the British Bankers Association. I continue with the same technique proved useful in the predictability analysis of forex exchange rates, as our interest in the interest rates in general is in part provoked by the results of the latter analysis, namely:

• sometimes, one forex exchage rate can "show the way" to a number of others, or in other words, foretell (in a probabilistic or statistical sense) their movement.
• when that happens, it is usually the exchange rate with a large interest rate differential showing the way to the ones with lower interest rate differentials.

Obviously, when exploring these "loopholes" or market inefficiencies for wealth generation, an algorithmic trader or a forex trading system (an automated decision making algorithm such as the one being built here on Forex Automaton™ site) must be mindful of the picture of LIBOR rates and its evolution, albeit in a somewhat different context than a long-term money manager. Being able to predict events, even in a weak statistical sense, is even better than merely following. Besides being useful via their implications for forex forecasting, LIBORs form an underlying indicator for derivatives of their own. LIBOR futures contracts and options on such contracts are traded on the CME. How does the predictability of LIBORs compare with that of currencies? Which one, LIBOR or forex, is more attractive to trade? Answering these questions, or providing a technical analysis framework to approach the answers, while leaving the fundamentals and event-driven trends aside, this series of articles about correlation features in LIBORs will serve as a useful compliment to our set of forex correlation analysis notes. I start this new series of articles with the all-important US Dollar LIBOR.