Forex-LIBOR correlations: EUR/JPY 2002-2009

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Written by Forex Automaton   
Wednesday, 18 March 2009 17:25
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Forex-LIBOR correlations: EUR/JPY 2002-2009
Forex-LIBOR correlations for EUR/JPY
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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.

EUR/JPY bar chart 2002-2009, day scale.

Fig.1: EUR/JPY bar chart, 2002-2009, day scale. Time axis is labeled in MM-YY format.

History of s/n-o/n LIBOR interest rate differential EUR-JPY 2002-2009 History of 3-month LIBOR interest rate differential EUR-JPY 2002-2009 History of 12-month LIBOR interest rate differential EUR-JPY 2002-2009

Fig.2: History of EUR-JPY LIBOR interest rates differential, top to bottom: s/n-o/n, 3-month, and 12-month. Time axis is labeled in MM-YY format, same range as in Fig.1.

The daily logarithmic returns of EUR/JPY and daily logarithmic returns of the ratio of the respective LIBOR rates are the time series under correlation analysis. The EUR/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 both time series under study, EUR/JPY and the LIBOR ratio is shown 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.

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