LIBOR-o-logy

A series of analysis reports investigating degree of predictability in the LIBOR rates, a popular capital cost indicator, via correlation techniques. The analysis is based on historical LIBOR interest rate data released by the British Bankers Association.

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JPY LIBOR 2007-2010: shorter maturities mean-revert, longer ones form trends
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Written by Forex Automaton   
Friday, 29 October 2010 11:44

Statistically significant patterns in the Japanese yen LIBOR time series have been discussed on this site in October 2008, based on a data set ending in summer 2008. The financial panic of 2008 that followed (I reserve the word "crisis" for a broader context) left its imprints on the Japanese yen, one of the world's primary funding currencies. The data presented here cover the period from August 16, 2007 (the day Countrywide Financial made the news, triggering a change in the US Fed stance) through July 30, 2010. I focus exclusively on autocorrelations within the yen LIBOR time series for various maturities, and on the cross-correlations between them. Surprisingly, the patterns are very similar to those of the 2008 report, despite the fact that the most dramatic movements in JPY LIBOR took place in fall of 2008 and were not analyzed previously.

Last Updated on Sunday, 06 May 2012 14:00
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USD LIBOR predictability 2007-2010: shorter maturities show the way
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Written by Forex Automaton   
Friday, 22 October 2010 09:59

A series of LIBOR correlation articles published on this site in late 2008--early 2009 were very well received by the readers. The financial panic of 2008 was the most extreme event for LIBOR, and for reasons of timing, was not covered very well in these articles. Now, I am coming back to the topic with more data and the same statistical analysis framework. The data presented here cover the period from August 16, 2007 (the day Countrywide Financial made the news, triggering a change in the Fed stance) through July 30, 2010. The period chosen is the one characterized by the US Fed single-minded focus on lowering the short- and longer-term interest rates. Not surprisingly, this definite trend shows up in the correlation analysis as a broad positive correlation peak. Cross-correlation analysis of different maturities shows shorter maturities to play the role of leading indicators for the longer ones. The effect has a characteristic time length of up to ten days. It is the most prominent when combining overnight LIBOR with the 1-month one, or combining the 1-week LIBOR with longer terms.

Last Updated on Saturday, 05 May 2012 15:08
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LIBOR patterns: the story continues with CME:EM futures
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Written by Forex Automaton   
Thursday, 03 September 2009 11:49

With the remarkable correlation patterns seen in the logarithmic return autocorrelation data for LIBOR, the question of practical importance is to see how much of the pattern survives in the freely traded instruments related to the interest rates. This question will be addressed in several installments. I begin with Eurodollar futures traded on Chicago Merchantile Exchange (CME). This is the first article in the sequel series on the subject.

Last Updated on Monday, 04 January 2010 12:29
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Forex-LIBOR correlations: EUR/JPY 2002-2009
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Written by Forex Automaton   
Wednesday, 18 March 2009 17:25

The results for EUR/JPY and the respective LIBOR ratio, obtained in the inter-market correlation technique for logarithmic returns, look somewhat disappointing. The sharp zero-lag peaks seen in USD/JPY for LIBOR durations longer than 3 months are absent here. The quantitative analysis of time lag dependence of the correlation shows the EUR/JPY movement during the crisis to precede, rather than to follow the interest rate developments, however this seems to be more of a single long-range event than a repetitive and predictive temporal connection required for trading system formulation.

Last Updated on Friday, 22 October 2010 10:07
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Forex-LIBOR correlations: USD/JPY 2002-2009
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Written by Forex Automaton   
Monday, 16 March 2009 14:10

This post continues the work of Forex-LIBOR correlation started last week with EUR/USD: using inter-market correlation to get a first-hand understanding of the connection between the interest rates and forex on the basis of real data. The milder volatility pre-crisis period ("A") and the present crisis ("B") are studied separately and compared.

Executive summary: LIBORs with maturity below 3 months appear uncorrelated with forex, whereas longer maturities are correlated with it. Surprisingly, the volatility-adjusted (via Pearson normalization) correlation seems to become stronger in period B despite the interest rate cuts and doubts about relevancy of LIBOR fixing amidst the credit crunch.

Last Updated on Monday, 04 January 2010 12:38
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Forex-LIBOR correlations: EUR/USD 2002-2009
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Written by Forex Automaton   
Thursday, 12 March 2009 12:16

I use inter-market correlation to get a first-hand understanding of the connection between the interest rates and forex. I start with EUR/USD and, for the sake of uniformity, the respective ratio of LIBORs of various maturities. The correlation is a function of the time lag and in real life, in contrast with the efficient market assumption, its behavior with time lag is often informative. As usual, I pay particular attention to the non-zero time lags since these, when non-zero in a statistically significant way, quantify predictability of the time series, provided there are reasons to expect that some aspects of the time series repeat themselves over time. The present crisis and the preceding milder volatility period are studied separately and compared.

Executive summary: the correlation between LIBOR interest rates and forex should not be taken for granted. For example, in the pre-crisis period of 2002-2007, no correlation between shorter LIBOR maturities and EUR/USD is detected. During the crisis, long range correlations are seen in the movements of the instruments -- again surprising given the interest rate cuts and doubts about relevance of LIBOR fixing in the midst of a credit crunch.

Last Updated on Monday, 04 January 2010 12:39
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USD LIBOR 2002-2008: predictability in times of credit tightening and expansion
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Written by Forex Automaton   
Tuesday, 13 January 2009 12:15

The original USD LIBOR technical predictability note presented a time-integrated measurement of autocorrelations and cross-correlations associated with the USD LIBOR of various maturities. This note follows up on the topic with a time-evolution study, splitting the 2002-2008 range into separate year-long intervals. Due to changes in volatility, the integrated picture might be dominated by a few time periods of the highest volatility.  For this and other reasons, a time-evolution study is useful. It's interesting that LIBOR correlations from 2008, the year of credit crisis, look neither uninformative nor artificial. While the LIBOR patterns of 2008 are quantitatively different from other years, they do not look fundamentally different from other years with falling interest rates -- once the monstrous volatility of 2008 is taken out of the picture by proper normalization. The main finding is that the correlation patterns in the years of falling interest rates are similar among themselves and different as a class from those found in the years of rising interest rates  The interest-rate hike regime is seen as more predictable for the money markets, predictability being defined purely technically as a non-zero correlation at non-zero time lags.

Last Updated on Monday, 04 January 2010 12:42
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New Zealand Dollar (NZD) LIBOR: technical predictability overview
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Written by Forex Automaton   
Monday, 22 December 2008 14:44

The New Zealand Dollar LIBOR has been mostly rising during the period under study, like it did for the Australian Dollar. Motivation for publishing LIBOR correlation analysis on a forex trading system site has been outlined in the first USD LIBOR analysis article. 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 NZD LIBOR terms. As for the Aussie, the predominant predictive pattern for the NZD LIBOR interest rate is a "damped oscillation", but unlike AUD, the pattern stays well pronounced not just for the spot-next/overnight and 1-week, but even for the 6-month and 12-month duration terms. Another common feature is positive correlation peaks in the vicinity of the zero time lag, getting wider as the duration term grows. The cross-correlation of different maturities is oscillatory, but the trend is seen for the shorter term to be of predictive influence on the longer term (with either positive or negative "feed-back"), rather than the other way round as is the case with CAD and to some extent, USD LIBORs. The data cover the period from July 2003 up to December 2008.

Last Updated on Monday, 14 September 2009 17:01
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Swedish Krona (SEK) LIBOR technical predictability overview
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Written by Forex Automaton   
Tuesday, 16 December 2008 14:23

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.

Last Updated on Monday, 14 September 2009 17:02
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Danish Krone (DKK) LIBOR technical predictability overview
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Written by Forex Automaton   
Monday, 01 December 2008 14:30

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.

Last Updated on Monday, 14 September 2009 17:02
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Canadian Dollar (CAD) LIBOR technical predictability overview
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Written by Forex Automaton   
Wednesday, 19 November 2008 14:31

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.

Last Updated on Monday, 14 September 2009 17:03
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