## AUD/USD intraday seasonality overview, 2003-2010 - Variances and correlations |

Written by Forex Automaton | |||||

Monday, 10 January 2011 17:24 | |||||

Page 2 of 2 Daily variations in volatility can be studied in at least two different, but related ways: first, directly by calculating variance of logarithmic returns (Fig.2) and second, by observing probabilities of establishing daily extremes of price (low and high) during particular hours of the day (Fig.3). If the price evolution is random walk, it's hard to think of a reason why these two approaches would yield different results, provided that the intra-day variations of volatility are taken into account: the larger volatility is during a particular hour, the more likely it is that a daily extreme will be recorded during that hour. And since in hypothetic efficient markets, all information is discounted instantly, there is, hypothetically, nothing more to it than just the volatility.
A possible mechanism for a daily extreme to be had in low volatility regime is for this volatility to be of a mean-reverting nature, rather than purely random. I hypothesize that the mean reversion dynamics on an hour scale may result in the market making a change in direction for the day during those hours when the mean-reversion dominates. The transitions between mean-reversion and trend-following regimes could be seen in the magnitude of autocorrelations at non-zero lags, in particular, one-hour lag. This magnitude as a function of hour is presented in Fig.4. In the autocorrelation of returns, trend manifests itself in positive autocorrelation magnitudes at non-zero lags, while mean-reversion -- in negative ones. The two effects can coexist, if the range of non-zero lags with non-zero correlation signals is broad enough for that. Fig.4 looks only at one-hour lag. As Fig.4 reveals, AUD/USD was in trend-following regime during American trading activity peak, 15:00-19:00 CET on the plot, in 2003-2006. The effect is no longer there in 2007-2010. In the time window where, hypothetically, mean-reversion was required to explain the difference between Fig.2 and Fig.3, we indeed see mostly negative autocorrelation values in Fig.4. |
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Last Updated ( Thursday, 10 February 2011 09:46 ) |