TRY intermarket correlation: USD/TRY follows AUD/USD

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Written by Forex Automaton   
Sunday, 23 September 2012 10:30

A time-integrated study of hourly time-scale lagged correlation between USD/TRY and AUD/USD reveals a statistically significant correlation whereby AUD/USD leads and TRY/USD follows with a lag on one hour.

Compared to the series of intermarket correlation reports generated in 2008-2009 (not covering Turkish Lira), the new reports adopt a somewhat different approach to statistical uncertainty estimation. Instead of synthesizing mock time series with the volatility distribution of the real ones, producing their autocorrelations, and inferring the uncertainty from a comparison of many such analyses, as was done in 2008-2009, I now infer the uncertainty of the autocorrelation coefficients directly as a standard deviation of the sum, knowing the terms entering the sum. As before, hourly data are used and the quantity correlated is hourly logarithmic return.

The data used cover the period from November 14, 2010 till September 01, 2012.

USD/TRY and AUD/USD hourly correlation 1.1 USD/TRY and AUD/USD hourly correlation zoomed 1.2

Fig.1. Correlation in hourly logarithmic returns between USD/TRY and AUD/USD, 2010-2012. 1.1: Lags from 0 to 200 hours. 1.2: Zooming on the signal. The correlation is normalized so that total correlation corresponds to correlation strength of 1, total anti-correlation -- to correlation strength of -1 (see Pearson correlation coefficient).

The time lag between the USD/TRY and AUD/USD time series is defined as

td = tUSD/TRY - tAUD/USD.

The negative correlation content in the +1 hour time lag bin is seen with about three standard deviations. This means that a move (the present analysis is insensitive to the direction of that move) in USD/TRY and time t and a move in AUD/USD at time t-1 are negatively correlated over the time of observation. This is the same as saying the TRY/USD follows (trails) a movement in AUD/USD with a lag of one hour. Due to the discrete nature of binning, the actual ticks that create the effect could be separate by a time interval from anything about zero to anything below two hours and still land in the separate adjancent hourly periods, creating a 1-hour lag effect. The average such time interval is one hour.

USD/TRY and AUD/USD hourly autocorrelations, zoomed

Fig.2. Autocorrelation in hourly logarithmic returns in USD/TRY and AUD/USD, 2010-2012. The correlation is normalized as in Fig.1.

Speaking of pair trading, when forming a pair of AUD/USD and USD/TRY, due to the negative correlation, both assets must be held short or long at the same time. The relative weight with which AUD/USD and USD/TRY enter the pair must be optimized to increase the one-lag correlation with respect to the one at lag zero. Qualitatively speaking, the features around zero in Fig.2 (negative autocorrelations at 1-hour lag) will interefere constructively with the feature in Fig.1 (also negative). The resulting pair will be a mean-reverting autocorrelated time series.

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