AUD/JPY and EUR/USD leader-follower history - Correlation of AUD/JPY and EUR/USD

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Written by Forex Automaton   
Wednesday, 03 December 2008 10:27
Article Index
AUD/JPY and EUR/USD leader-follower history
Correlation of AUD/JPY and EUR/USD
Time history of EUR/USD, AUD/JPY volatilities and correlation
History of LIBOR interest rate differentials. Conclusion.
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AUD/JPY and EUR/USD intermarket correlation 1 hour time-lag bin Time history of AUD/JPY and EUR/USD intermarket correlation, 2002-2008

Fig.2: Cross-correlation of AUD/JPY and EUR/USD, derived from the hour-by-hour logarithmic returns, for the liquid trading hours, 4am to 8pm New York time, October 2002 to October 2008. Top: correlation as a function of the time lag. Bottom: time history of the magnitude of the zero time-lag Pearson correlation coefficient shown against the backdrop of statistical noise (red). The noise is obtained from martingale simulations based on the recorded volatilities of AUD/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.

Fig.2 presents the correlation between AUD/JPY and EUR/USD as a Pearson correlation coefficient, taking variable volatility (variance) out of the picture. While most of the correlation (and all of the public data known to me elsewhere on the web) is focused on the 0 lag, correlations with non-zero time lags are of particular importance for the purpose of forex forecasting and trading system development. The fact that the correlation peak seems to have a tail extending into the area of negative lags indicates that AUD/JPY can be used to forecast EUR/USD (of course, as always, in a weak statistical sense). Since the time lag is defined as


where "1" denotes AUD/JPY and "2" denotes EUR/USD, the asymmetry of the peak towards the negative lags area means that whatever happend with AUD/JPY, tends to happen next hour with EUR/USD. Thus the trend is for the AUD/JPY to lead and for the EUR/USD to follow.

Last Updated ( Wednesday, 24 March 2010 16:54 )