TRY intermarket correlation: USD/TRY follows AUD/JPY

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Written by Forex Automaton   
Tuesday, 11 December 2012 06:32

A time-integrated study of hourly time-scale lagged correlation between USD/TRY and AUD/JPY reveals a visible if not highly statistically significant correlation whereby AUD/JPY leads and TRY/USD follows with a lag on one hour.

Correlations of that kind were abundant in the 2002-2008, as summarized in the leading indicators section of the First Annual Report. But the markets evolve with time.

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 December 07, 2012.

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

Fig.1. Correlation in hourly logarithmic returns between USD/TRY and AUD/JPY, 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/JPY time series is defined as

td = tUSD/TRY - tAUD/JPY.

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/JPY 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/JPY 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/JPY hourly autocorrelations, zoomed

Fig.2. Autocorrelations in hourly logarithmic returns in USD/TRY and AUD/JPY, 2010-2012. The correlation is normalized as in Fig.1. As compared to AUD/JPY autocorrelation, hour time frame, measured using the 2002-2008 data, the mean-reversion signature, which used to dominated the 2002-2008 data, is not statistically significant in the 2010-2012 data.

Speaking of pair trading, when forming a pair of AUD/JPY 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/JPY and USD/TRY enter the pair must be optimized to increase the one-lag correlation with respect to the one at lag zero. The resulting pair will be a weakly mean-reverting autocorrelated time series.

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