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.

I define the visible phase of the present financial crisis to begin on August 16, 2007, the day of Countrywide Financial near-bancruptcy event, followed by an extraoridinary half-percent Fed discount rate cut next day. This study covers 82 weeks from August 2, 2007 through February 12, 2009. The sub-range of extreme volatility is defined, for the sake of consistency with the other posts in this series, as the last 28 weeks of this range, that is, starting with August 28, 2008. The volatility surge in GBP/CHF itself did not arrive until at least a couple of weeks later, unlike many other currency pairs. In this study, I only look at trading activity taking place from 1am to 1pm New York time, since the experience shows it to be the richest in non-trivial correlations.

Evolution of GBP/CHF autocorrelation peak structure during the financial crisis, hour.

Fig.1:GBP/CHF during the financial crisis, hour time scale. Time axis is labeled in MM-YY format and spans the interval from August 2, 2007 through February 12, 2009.

Evolution of GBP/CHF autocorrelation peak structure during the financial crisis, hour.

Fig.2: Evolution of GBP/CHF autocorrelation peak structure during the financial crisis, hour time scale. Time bin is two weeks wide. The peak structure is represented by three correlation values: the one for the zero lag (essentially a volatility measure) downscaled by 10 for easier visual comparison, the one at one hour lag (just discussed) and the one at two hour lag. Time axis is labeled in MM-YY format and spans the interval from August 2, 2007 through December 31, 2008. Only trading hours from 1am to 1pm New York time (European trading hours), usually rich in non-trivial correlations, are included.

Fig.2 shows the evolution of the correlation structure in the vicinity of zero time lag, representing the correlation structure as a triplet of correlation values: those at zero, one and two hour lags. The increased volatility shows up as the increase in the magnitude of all these values, with variance (a measure of volatility) being fairly well represented by the magnitude of the zero time lag value.

Most of the ForexAutomaton articles on the "patterns of financial crisis" turned out to be mainly about one pattern, the "bipolar disorder" one. By this I denote a tendency to form quickly alternating rises and falls on next-hour time scale, more pronounced than in a fully unpredictable time series of the same volatility. The pattern shows up as negative deeps surrounding the zero-time lag peak, and the way to quantify it in the hour scale analysis is to look at the correlation value at one hour lag -- presented in red in Fig.2.

GBP/CHF is perhaps not the clearest example of the bipolar disorder -- time-wise, the pattern is not as stable and convincing here as it is for example in EUR/GBP or EUR/USD. As seen from Fig.2, most of the contribution to the signal comes from the last two week of December, following a U-turn in GBP/CHF.

Autocorrelation of logarithmic returns in GBP/CHF,  European trading hours, hour scale, from August 2, 2007 through August 27, 2008. Autocorrelation of logarithmic returns in GBP/CHF,  European trading hours, hour scale, from August 28, 2008 up to  February 12, 2009.

Fig.3: Autocorrelation of logarithmic returns in GBP/CHF for the European (Eurasian) trading shown against the backdrop of statistical noise (red). Top panel: the measurement time range is for the relatively low volatility phase of the crisis, from August 2, 2007 through August 27, 2008. Bottom panel: same for the high volatility phase, from August 28, 2008 up to February 12, 2009. The noise is obtained from martingale simulations based on the recorded volatilities of GBP/CHF in the trading hours under study for the period. The noise is presented as mean plus-minus 1 RMS, where RMS characterizes the distribution of the correlation value obtained for each particular bin by analyzing 20 independent simulated uncorrelated time series of the same average volatility. The change in the shape of the autocorrelation in the vicinity of the zero-time lag peak is in line with what has been observed to happen with most other forex exchange rates.

Nevertheless, the direction in which the correlation in the vicinity of zero lag evolves, going over in time from "phase 1" to "phase 2", is the same as seen with most other currency pairs, except the ones which were "bipolar" even before the crisis began -- from less or no bipolar disorder to more of it.

The data used are from the period 2002-08-02 00:00:00 to 2009-02-12 00:00:00, New York time.

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Last Updated ( Monday, 04 January 2010 12:38 )