The First Annual Summary of Forex Automaton Research Progress, April 2009 - What did the crisis change?

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Written by Forex Automaton   
Friday, 03 April 2009 13:22
Article Index
The First Annual Summary of Forex Automaton Research Progress, April 2009
Forex bipolarity
Leading indicators
Periodicity or oscillation
What did the crisis change?
Black-box algorithm paper-trading
Conclusions. Future.
All Pages

What did the crisis change?

With the present crisis a topical theme, many various epithets are being attributed to the markets. What exactly changed with forex during the crisis? Did the exchange rates become unpredictable (efficient)? Less predictable than usual? More predictable in a new way? Was it a qualitative change in the set of predictability patterns? Or was it only a change in the amplitude of the fluctuations? -- this was the set of question I set out to explore in the "Time evolution..." section of the blog. So far, having looked at the autocorrelations only, a few things became clearer.

There is a pre-history dependence pattern to accompany the volatility increase

Over and over in the time dependence of the auto-correlation peak structure for the various forex rates, the same pattern is seen: as the volatility goes up dramatically starting in Fall 2008, so does the "bipolar disorder" pattern. From a pure math point of view, "volatility" as  the second moment with zero time lag (essentially, variance) tells one nothing about predictability or unpredictability, and the volatility of any magnitude can exist in "efficient" martingale markets or in the markets which are to some extent pre-history dependent. In real life, the acute phase of the crisis did not flatten the correlation functions at non-zero lags, but distorted them to move even further away from the pattern of a stable trend. The markets oscillate, they move up today because they moved down yesterday and vice versa. This is the "bipolar disorder" pattern.

Fig.4.1. Modification of the auto-correlation structure in the vicinity of zero lag peak during the present financial crisis. Click on the panel to get to the article reporting the measurement. Vertical scales may differ among panels. Top: low volatility phase of the crisis. Bottom: same market during the high volatility phase of the crisis (its end point may differ for analyses performed at different time). Left to right: AUD/JPY, AUD/USD, CHF/JPY, EUR/CHF, EUR/GBP, EUR/JPY, EUR/USD, GBP/CHF, GBP/JPY, GBP/USD.

The bipolar disorder pattern which manifests itself in the negative correlation quantity at the next-to-zero lag, is seen in Fig.4.1 to become more popular in the bottom row of plots. The correlations seem to be dragged to conform with the "bipolar" shape, at least such is the conclusion drawn by comparing the top panels of pictures, which cover the time slice from August 2007 to August 2008, to the bottom row which covers what happened afterwards at much higher volatility.

Should we be surprised that the markets turned manic-depressive during the panic, instead of being "efficient"?

Last Updated ( Thursday, 31 March 2011 10:06 )