Forex-LIBOR correlations: USD/JPY 2002-2009 |
| Written by Mikhail Kopytine | |||||||||
| Monday, 16 March 2009 14:10 | |||||||||
Page 1 of 2 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.
Fig.1: USD/JPY bar chart, 2002-2009, day scale. Time axis is labeled in MM-YY format. Fig.2: History of USD-JPY LIBOR interest rates differential, top to bottom: s/n-o/n, 1-week, 1-month, 3-month, 6-month and 12-month. Time axis is labeled in MM-YY format, same range as in Fig.1. The daily logarithmic returns of USD/JPY and daily logarithmic returns of the ratio of the respective LIBOR rates are the time series under correlation analysis. The USD/JPY was aggregated on a day scale specifically for this type of analysis, a "day" being defined to close at the moment of LIBOR fixing -- 11am London time. It is more common to analyze the difference (Fig.2), and not the ratio, of interest rates. However, the logarithm calls for a positive quantity, and given questionable convergence of second moments of the "raw" quantities (as discussed by Mandelbrot), keeping the analysis logarithmic is very important. The time evolution of USD/JPY and the respective LIBOR differential is show in Fig.2. As before, I define the visible phase of the present financial crisis, labeled B in figures, to begin on August 16, 2007, the day of Countrywide Financial near-bankruptcy event, followed by an extraordinary half-percent Fed discount rate cut next day. Fig.3 shows the time evolution of the correlation peak by plotting the correlation values for the negative and positive lags in separate panels. |
|||||||||
| Last Updated ( Monday, 04 January 2010 12:38 ) | |||||||||
Add your comment
Active algorithmic systems:
Danica | daily | 9am Eastern time | 14 forex pairs
"I noticed that in advances as well as declines... prices were apt to show certain habits, so to speak. There was no end of parallel cases and these made precedents to guide me. I was only fourteen, but after I had taken hundreds of observations in my mind I found myself testing their accuracy, comparing the behaviour of stocks to-day with other days. It was not long before I was anticipating movements in prices. My only guide, as I say, was their past performances. I carried the "dope sheets" in my mind. I looked for... prices to run on form. I had "clocked" them. You know what I mean... Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the... market to-day has happened before and will happen again."
-- from Reminiscences of a Stock Operator, a classic by Edwin Lefèvre, inspired by the biography of a legendary trader Jesse Livermore, an author himself, who made and lost fortunes, was like catnip to women and commited suicide at an age of 63.
Related
"...I hope to prove that traditional approaches such as the economic indicator approach do not work. No consistent correlation exists between the U.S. dollar and U.S. economic indicators, but conventional wisdom says that the two move in lockstep. Why is this approach followed so fervently if its foundation is rooted in falsities? The reason that markets move in identifiable patterns is probably the same reason that many accept as gospel the conventional approaches to market analysis and trading that have marginally successful track records at best. That reason is the propensity for humans to follow the crowd, especially in situations as emotionally driven as trading. ...I think that I can share with you a better (and cheaper) approach to analyzing and trading the FX market, an approach that will give you an edge, if only because you are not following the crowd." -- Jamie Saettele, Sentiment in the Forex Market.
Futures Magazine Provides you with the essentials you need to make smart trading decisions... Our partner TradePub.com offers Futures Magazine for FREE to qualifying professionals.
Global Finance has been providing monthly news and analysis since 1987 about companies and financial institutions that do business around the world. Our partner TradePub.com offers this and other financial publications for FREE to qualifying professionals.
Share Your Opinion
|
Disclaimer: Forex, options and futures trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the forex markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell forex, options or futures. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may be under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown. See Terms of Service for the full disclaimer. |
Copyright © 2010 Forex Automaton. All rights reserved.
Joomla! is Free Software released under the GNU/GPL License. ROOT -- An Object-Oriented Data Analysis Framework.