USD LIBOR 2002-2008: predictability in times of credit tightening and expansion - USD LIBOR s/n-o/n autocorrelations, year-by-year comparison

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Written by Forex Automaton   
Tuesday, 13 January 2009 12:15
Article Index
USD LIBOR 2002-2008: predictability in times of credit tightening and expansion
USD LIBOR s/n-o/n autocorrelations, year-by-year comparison
USD LIBOR 1-week autocorrelations, year-by-year comparison
USD LIBOR 1-month autocorrelations, year-by-year comparison
USD LIBOR autocorrelations, 3-month and longer terms, year-by-year comparison
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In the autocorrelation distribution for the time series of zero mean, the magnitude of the zero time-lag peak equals variance of the varibale which constitutes the time series (logarithmic return of LIBOR in our case). Dramatic changes in this variance with time (variations in volatility) obscure visual comparison of features common to different time periods in the same figure. For this reason, below I prescale all histograms (of autocorrelations) by the factor which equals inverse magnitude of the zero time-lag peak. After that, the histograms "match" each other at the peak. Large prescale factors correspond to low volatility and vice versa.

USD s/n-o/n LIBOR autocorrelation, day time scale, rising rates USD s/n-o/n LIBOR autocorrelation, day time scale, falling rates

Fig.2: Autocorrelation of logarithmic returns in the historical s/n-o/n USD LIBOR. Top: as measured in the years of rising interest rates: 2004, 2005, and 2006. Bottom: as measured in the years of falling interest rates: 2002, 2003, 2007, and 2008.

A few basic facts about autocorrelations may help interpreting the plots:

  • A positive autocorrelation in returns, associated with a certain time lag, means that you can bet that the current trend (be it up or down) will continue at the moment separated from now by that time lag.
  • A negative autocorrelation in returns means the opposite -- that a trend reversal is likely over that time lag.
  • Thus, the autocorrelation of a wave -- a highly predictable pattern -- looks like a wave.
  • The positive peak at zero lag by itself tells you nothing useful for prediction -- its magnitude is a measure of volatility.

The "bipolar disorder" feature, a tendency to form quickly alternating rises and falls on next-day time scale, more pronounced than in a fully unpredictable time series of the same volatility, shows up as negative deeps surrounding the zero-time lag peak, and is seen in time series of some interest rates and forex exchange rates, especially the ones with high interest rate differential. In USD LIBOR, as seen from top vs bottom comparison in Fig.2, this feature appears more pronounced in the falling interest rates climate.

Both panels of Fig.2 show periodic structures. The period and the peak positions ("phase" of the structure) show a fair degree of stability year from year, and despite the change in the interest rates dynamics.



Last Updated ( Monday, 04 January 2010 12:42 )
 

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