CHF/JPY and EUR/USD leader-follower history

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Written by Forex Automaton   
Tuesday, 11 November 2008 17:26
Article Index
CHF/JPY and EUR/USD leader-follower history
Time history of CHF/JPY, EUR/USD volatilities and correlation
Time history of the signal
CHF-JPY and EUR-USD LIBOR differentials
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This is a follow-up report on the leader-follower correlation between CHF/JPY and EUR/USD. To those who are new to this site: the blog focuses on applying quantitative analysis to forex in search for patterns which can be utilized for trading short range, the minimal time scale being one hour. These are postulated not to exist in efficient markets, and those who approach the market with that assumption, will find that the ugly asymmetric reality of forex holds little respect for that beautiful theory. The initial review of such forex inefficiencies, broad but superficial as it was, did reveal a number of specific effects to talk about. These became "acting characters" for the sequel stories, presenting in-depth studies, and tracing the characters' destinies. This article about CHF/JPY and EUR/USD, discussing the time evolution and time stability of the effect, is one of such stories. It appears that the predictability "loophole" such as this has been alive as recently as third quarter of 2008.

CHF/JPY and EUR/USD intermarket correlation 1 hour time-lag bin CHF/JPY and EUR/USD intermarket correlation 1 hour time-lag bin, European trading, noise comparison CHF/JPY and EUR/USD intermarket correlation 1 hour time-lag bin, American trading, noise comparison

Fig.1: Cross-correlation of CHF/JPY and EUR/USD, derived from the hour-by-hour logarithmic returns. Top: comparing the three trading sessions. Time frames of the sessions are shown in New York time. Middle: European (Eurasian) trading session shown against the backdrop of statistical noise (red). The noise is obtained from martingale simulations based on the recorded volatilities of CHF/JPY and EUR/USD in this trading session for the period under study. 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 pairs of uncorrelated time series. Bottom: same as middle for the American trading session. Hour time scale.

CHF/JPY and EUR/USD are positively correlated, this fact is well known and the current magnitude of the correlation can be found on popular web sites without difficulty. While most of the correlation (and all of the public data elsewhere on the web) is concentrated at the 0 lag, correlations with non-zero time lags are of particular importance for the purpose of forex forecasting and trading system development. The correlation pattern of the European session look somewhat different from the rest in Fig.2: the central peak has a tail extending several bins to the left (meaning that the first currency of the pair, CHF/JPY, predicts the second, EUR/USD), whereas in the American session it's just a somewhat higher signal in the left bin next to the center.

As usual, we inspect significance of the predictive correlation in the CHF/JPY and EUR/USD exchange rates by comparing it with the expected statistical fluctuaitons (noise) in Fig.1, as explained in the figure caption. Since the time lag is defined as


where "1" denotes CHF/JPY and "2" denotes EUR/USD, the peak asymmetry into the negative lags area means that the trend is for the CHF/JPY to lead and for the EUR/USD to follow.

Last Updated ( Monday, 14 September 2009 16:51 )