USD/CHF 2004-2008: another "fair game"?

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Written by Forex Automaton   
Wednesday, 11 June 2008 09:44

The US Dollar/Swiss Franc exchange rate has autocorrelation of a perfectly random time series, except for the daily pattern of variation in activity.

The basic autocorrelation

USD/CHF autocorrelation 1 hour time-lag bin

Fig.1:Autocorrelation of hourly logarithmic returns in USD/CHF. The time lag is in "business time" (periods without update ticks are excluded). The red band shows the level of noise as iferred from martingale simulations (see text).

We employ autocorrelation as a straightforward, inter-disciplinary, non-proprietary technique to test market efficiency in the USD/CHF market. In Fig.1 we look for features on the time scale of up to two days such as to suite the time scale of day trading or swing trading. The hatched red band shows the range of statistical noise (namely its expectation plus minus its RMS deviation). Statistical noise was obtained by simulating 20 independent time series of the length corresponding to that of the USD/CHF series, each one constructed to reproduce the measured distribution of returns for the time period under study, but completely devoid of correlations (martingale time series). From these, the expectation and RMS of the autocorrelation amplitude in each time lag bin were calculated. We see no interesting features in this figure.

USD/CHF bullish and bearish autocorrelation

Fig.2:USD/CHF bullish and bearish autocorrelations. Yellow: correlating only positive hourly returns. Blue: correlating only negative hourly returns.

In Fig.2 we construct autocorrelations of the subsamples of the full time series (the "bullish" and "bearish" ones) selected by taking only positive and negative returns respectively. The 24 hour cycle of bullish and bearish action is clearly seen here as in most other currency pairs. Typically, the "bearish" correlation has a higher amplitude whenever the base currency has a higher interest rate. This is the case here as well although the effect is not as strong as in the currency pairs with a larger interest rate differential.

USD/CHF bullish and bearish autocorrelation long range

Fig.3:USD/CHF bullish and bearish autocorrelations as in Fig.2 but showing a longer range of time lags.

Although the information in Fig.3 does not allow you to predict moves in USD/CHF, the range of the daily oscillation in the autocorrelation amplitude and the time scale of its decay ("market memory" time of sorts) are non-trivial pieces of information.

For this study we used data from 2004-03-29 through 2008-02-01.

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