Time evolution of forex inefficiencies

Any statistical test of market inefficiency requires a finite time of observation. The series of notes surveying historical inefficiencies of forex, posted here under the rhetorical title "Have the forex markets been efficient?", were based on data covering time interval of about five and a half years. In many cases, significant predictive correlations have been detected, having survived the time averaging process. To be of practical value for forecasting and algorithmic trading, these features have to be expectable in the future, at least in principle. A rare but huge event and a frequent one of a moderate magnitude may leave the same trace on the autocorrelation. At the very least, one must ensure that these time-averaged signals are not merely diluted residues of one or two rare events. The focus of this series of notes is time continuity, time evolution, and analysis of the origins of the now uncovered historically significant forex inefficiencies.

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Intraday alternation of trending and mean-reversion in FX
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Written by Forex Automaton   
Wednesday, 23 February 2011 16:13

This post is the first attempt to summarize intra-day seasonality findings from the six major exchange rates involving USD, focused on the hour-scale correlation structures. Taking advantage of the "non-trivial" (non-zero time lag) correlations in forex is complicated since their structure changes during the day, and a residual structure that survives the multi-day averaging is for this reason weaker than what may exist in a stable way at a certain time period during the day. Averaging is necessary to accumulate statistics and let the signals dominate the noise. But in doing that, I contain averaging within temporal classes or "bins", combining bars of the data recorded at the same or close times during different days, months and years of observation. When cyclicity of time is thus taken advantage of, a weak but significant and stable pattern of intra-day alternation between trend-like and mean-reversion behavior emerges.

Last Updated on Sunday, 01 April 2012 14:54
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Japanese yen (JPY) intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Thursday, 17 February 2011 10:11

Intra-day seasonality in JPY is researched by averaging hourly logarithmic returns, grouped systematically into temporal "bins" according to the time of the day. Two types of average, the average across years of observation for each instrument, and an average across instruments for each year, are presented. The instruments are USD/JPY and four popular crosses involving AUD, EUR, GBP and CHF. The effects look practically insignificant given the typical levels of trading costs available to a retail trader, and given the lack of time stability.

Last Updated on Thursday, 17 May 2012 16:10
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CHF/JPY intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Tuesday, 15 February 2011 12:47

This CHF/JPY report completes a set of systematic intraday pattern research reports involving JPY as the base currency. This will be followed by a synthesis report for JPY, following the format already tried for USD.

Last Updated on Thursday, 17 March 2011 17:13
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GBP/JPY intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Thursday, 10 February 2011 10:37

This GBP/JPY report contributes to a set of systematic intraday pattern results involving JPY as the base currency. GBP/JPY as most other currency pairs tends to experience mean reversion around CET midnight.

Last Updated on Sunday, 25 March 2012 16:24
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EUR/JPY intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Monday, 07 February 2011 13:35

A systematic search for forex inefficiencies in an unlikely place, the daily variation of temporal and cross-market averages of hourly logarithmic returns, initially undertaken for the sake of scientific completeness in the context where results were expected primarily from correlation observables, unexpectedly yielded non-trivial results. The results for exchange rates involving USD as the base currency have been summarized elsewhere. This EUR/JPY report contributes to another set of results involving JPY as the base currency.

Last Updated on Thursday, 17 February 2011 10:13
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EUR/CHF intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Monday, 24 January 2011 15:07

The EUR/CHF hourly average log returns, even non-zero in a systematic way, are too low to offer a tradeable strategy. The time series is mean-reverting on the hour scale throughout the day showing no signs on a regime switch common to some other exchange rates.

Last Updated on Thursday, 10 February 2011 10:42
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USD/CHF intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Thursday, 20 January 2011 11:15

USD/CHF tends to show bearish dynamics for several hours following the start of American trading. The European night has a bias towards mean reversion.

Last Updated on Monday, 07 February 2011 13:47
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AUD/USD intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Monday, 10 January 2011 17:24

A notable stable effect on the hour scale in AUD/USD is mean-reversion dominance during the morning hours of the Asia-Pacific trading session. Qualitatively this is common to all exchange rates studied in this set of reports so far, but quantitatively, the 1-hour negative autocorrelation is very strong in AUD/USD. The pattern of residual non-zero average hourly returns in AUD/USD in 2003-2010 is similar to AUD/JPY.

Last Updated on Thursday, 10 February 2011 09:46
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USD/CAD intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Thursday, 30 December 2010 15:40

The regime change from mean reversion to trend following is seen to occur daily in USD/CAD. Like in other pairs studied so far, the statistically preferred time to bet on a trend reversal in USD/CAD is the morning hours of the Asia-Pacific trading session. Evidence for that comes from time dependence of autocorrelations of logarithmic returns with 1-hour lag. The hour ending at 17:00 CET (11am ET) favors trend following.

Last Updated on Thursday, 10 February 2011 09:46
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GBP/USD intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Tuesday, 28 December 2010 15:52

This GBP/USD report continues a new series of reports about intra-day "seasonality" effects in FX, gathering facts on the ground for an upgrade of the hour-scale algorithmic forecasting system. From the point of view of this approach and the features it reveals, GBP/USD is somewhat similar to EUR/USD.

Last Updated on Thursday, 10 February 2011 09:46
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USD/JPY intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Monday, 27 December 2010 17:04

This USD/JPY report continues a new series of reports about intra-day "seasonality" effects in FX, reinforcing the emerging picture of peculiar "stationary" non-stationarity in these time series: even though there is no invariance of the time series properties with respect to an arbitrary time interval, there seems to be some degree of translation invariance with respect to the 24-hour time interval in both variance of logarithmic returns (expected), lagged covariance (not-so-well known) and mean logarithmic return (not-so-well known). Like in other time series studied so far, the hourly movements in USD/JPY do not average to zero for every hour of the day.

Last Updated on Thursday, 10 February 2011 09:47
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AUD/JPY intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Tuesday, 14 December 2010 17:51

This report continues a new series of reports about intra-day "seasonality" effects in FX. Like in EUR/USD, the hourly movements in AUD/JPY do not precisely average to zero for every hour of the day. Moreover, there appears to be a statistically preferred time to bet on a trend reversal in AUD/JPY. Evidence for that comes from the comparison of temporal distribution of daily extremes with temporal distribution of volatility, and from autocorrelations of logarithmic returns with 1-hour lag.

Last Updated on Monday, 07 February 2011 13:48
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EUR/USD intraday seasonality overview, 2003-2010
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Written by Forex Automaton   
Tuesday, 07 December 2010 14:41

In the past, we have looked at hour-scale autocorrelations and intermarket correlations in FX, averaged over observation intervals as long as several years. We have also looked at time evolution of interesting correlation effects, averaged over shorter time intervals. This report begins a new series of reports about intra-day "seasonality" effects in FX. We are interested in seasonality effects in both first (averages) and second-order (variances, correlations) statistics. If the correlation patterns happen to be meaningfully different during different times of the day, one can use this to one's advantage by programming the forecasting algorithms to work differently during those times, and by using different sets of parameters. Different models would be responsible for the different "seasons" of the day. This first report, dedicated to EUR/USD, begins accumulating such data.

Last Updated on Saturday, 02 April 2011 07:15
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CHF/JPY and EUR/AUD leading indicator history, 2002-2009
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Written by Forex Automaton   
Tuesday, 28 April 2009 10:55

In the screening we conducted last summer using the data set from 2002 to early 2008, CHF/JPY was identified as a leading indicator for EUR/AUD. This time-evolution study confirms that the signal was real, as the fairly robust relationship persisted till the middle of 2007. Around the middle of 2007, CHF/JPY and EUR/AUD changed from being positively correlated to being negatively correlated. About the same time, CHF/JPY stopped being a leading indicator for EUR/AUD. Curiously, it's hard to interpret this as a result of changes in the interest rates: dramatic changes in that area did happen, but much later, not until the Fall of 2008.

Last Updated on Monday, 04 January 2010 12:36
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AUD/JPY and GBP/USD leading indicator history, 2002-2009
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Written by Forex Automaton   
Monday, 20 April 2009 16:41

AUD/JPY and GBP/USD form a weakly correlated pair, often but not always correlated positively, which many traders would regard to be one of the last suspects when it comes to predictive forex correlations. Nonetheless, in the screening we conducted last summer using the data set from 2002 to early 2008, AUD/JPY was found to form a leading indicator for GBP/USD. The feature was found by studying the time-integrated correlation of logarithmic returns in the two time series. As usual in such cases, a detailed time-evolution study is necessary to tell whether this effect is merely a result of a single high-impact event or a recurrent feature. I extend the period of observation up to April 2009, split it into three time windows of varying volatility, and analyze the time stability of the leading indicator effect.

Last Updated on Monday, 04 January 2010 12:36
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AUD/JPY and EUR/CHF leading indicator history, 2002-2009
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Wednesday, 15 April 2009 12:34

This is a follow-up report on the predictive feature discovered in the correlation analysis of AUD/JPY and EUR/CHF. The feature was found by studying the time-integrated correlation of logarithmic returns in the two time series. A detailed time-evolution study is necessary to tell whether this effect is merely a result of a single high-impact event or a recurrent feature. The effect in question was found not to exist in the Asia-Pacific trading, therefore in this report I cover the trading hours from 4am to 8pm New York time, which excludes Asia. I extend the period of observation up to April 2009 and analyze the time stability of the leading indicator provided by AUD/JPY for EUR/CHF.

Last Updated on Monday, 04 January 2010 12:37
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Patterns of financial crisis: USD/CAD in 2007-2009.
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Written by Forex Automaton   
Wednesday, 08 April 2009 16:47

With USD/CAD, I am continuing the series of reports focusing in the time evolution of the forex correlation shapes during the present financial crisis. Extending the time coverage up to the end of March, I see the need to make the picture a bit more complex with three, rather than two phases with considerably different volatility level, since the volatility is seen to abate at the end of January 2009. The bipolar correlation pattern, a major subject of this research, is seen to disappear during the peak of volatility, but reappear later.

Last Updated on Monday, 04 January 2010 12:37
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Patterns of financial crisis: GBP/CHF 2007-2009.
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Written by Forex Automaton   
Wednesday, 01 April 2009 12:59

Pre-history dependence is what distinguishes forex from random walk. I analyze logarithmic returns in GBP/CHF on an hour scale and trace the time evolution of the auto-correlation peak throughout the present crisis, starting with August 2007. What I call "bipolar disorder" has emerged from this series of reports as a prominent pattern to accompany the high volatility phase of the crisis. Like in EUR/GBP, "bipolar disorder" in GBP/CHF had a sharp peak during the last two weeks of December 2008.

Last Updated on Monday, 04 January 2010 12:38
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Patterns of financial crisis: CHF/JPY 2007-2009
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Written by Forex Automaton   
Tuesday, 24 March 2009 14:56

CHF/JPY dropped during the crisis, as did the interest rate differential between the currencies. The autocorrelation "pattern" of logarithmic returns resembles those of EUR/GBP, GBP/USD, EUR/JPY, and EUR/USD, with the hour-scale "bipolar disorder", seen in the analysis as a significant negative correlation value at one hour lag, growing in prominence during the volatile phase of the crisis. Still, in CHF/JPY it falls short of the magnitude seen in EUR/CHF (ironically, one of the least volatile in forex), not to mention AUD/USD. In short, not just the increased volatility discussed in the media, but also the "bipolar disorder", a particular form of pre-history dependence, is seen as the signature pattern of financial panic.

Last Updated on Monday, 04 January 2010 12:38
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Patterns of financial crisis: USD/JPY, SP500 and Nikkei
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Written by Forex Automaton   
Tuesday, 10 March 2009 16:10

The "instanteneous" correlation between the ratio of S&P500/ Nikkei-225 stock market indexes and USD/JPY has been mostly positive during the crisis. As with GBP/USD vis-a-vis FTSE/DJIA, EUR/USD vis-a-vis DAX/DJIA, and EUR/USD vis-a-vis CAC/DJIA, one common feature is evident: one-day lag correlation "prefers" to have an opposite sign to the "instantaneous" correlation. For the case in hand, with the "instanteneous" correlation mostly positive, the stock index ratio seems to provide a stable leading indicator for USD/JPY suitable in principle to be incorporated into a trading algorithm.

Last Updated on Monday, 04 January 2010 12:39
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Patterns of financial crisis: EUR/USD, CAC-40 and the Dow
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Written by Forex Automaton   
Wednesday, 04 March 2009 16:05

From the two cases considered so far in the index-1/index-2 vs currency-1/currency-2 correlation technique (correlating FTSE/DJIA and DAX/DJIA with EUR/USD), one common feature is evident: one-day lag correlation "prefers" to have an opposite sign to the "instantaneous" correlation. Today's post is about correlations between CAC/DJIA (the ratio of France's and US' blue chip indexes, Cotation Assistee en Continu and the Dow) and EUR/USD.

Last Updated on Monday, 04 January 2010 12:39
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