EUR/JPY intraday seasonality overview, 2003-2010

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Written by Forex Automaton   
Monday, 07 February 2011 13:35
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A systematic search for forex inefficiencies in an unlikely place, the daily variation of temporal and cross-market averages of hourly logarithmic returns, initially undertaken for the sake of scientific completeness in the context where results were expected primarily from correlation observables, unexpectedly yielded non-trivial results. The results for exchange rates involving USD as the base currency have been summarized elsewhere. This EUR/JPY report contributes to another set of results involving JPY as the base currency.

The report uses hourly data from January 1st, 2003 through January 26, 2011.

As I strive to make each of these reports self-contained, they are somewhat repetitive, especially when it comes to describing the analysis approach.

As always, the quantities we are going to look at are not the actual low, high and close. Since prices are always positive, they are trivially correlated; this feature is absent in the correlations of the so-called logarithmic returns (or logarithmic increments) which are the ratios of price levels (low, high, close) to the values they had during the previous hour-long time interval.

As in other posts dealing with intradey seasonality, I use Central Europen here. The convenience of using CET is that one gets 5 non-interrupted, full 24-hour long trading days per week, as explained in an article on CET which also provides a time zone conversion table.

Seasonality effects in first-order statistics (means) are straightforward to utilize in trading, therefore one could argue that such effects are not likely to be found. As already mentioned, previous intrady seasonality studies involving USD indicated that such effects nevertheless exist -- an example of how rational expectations regarding market inefficiencies do not work. To look for the effect, we average logarithmic returns for each hour of the day separately using profile histograms. The resulting histograms are plotted in Fig.1.

EUR/JPY averaged log return vs CET hour of the day, in 2003, 2004, 2005, 2006 1.1 EUR/JPY averaged log return vs CET hour of the day, in 2007, 2008, 2009, 2010 1.2 EUR/JPY averaged log return vs CET hour of the day, sum over 2003-2010 1.3

Fig.1. Averaged logarithmic return vs hour of the day in CE time for EUR/JPY. 1.1: Years 2003, 2004, 2005, 2006. 1.2: Years 2007, 2008, 2009, 2010. 1.3: All years added. Vertical bars indicate RMS precision of the mean. The usual caveat is that since the distributions of (even logarithmic) returns are generally non-Gaussian with heavier tails, confidence intervals to use with these errorbars are lower than standard.

Fig.1 presents hourly "seasonal" averages of the hourly logarithmic return in EUR/JPY. The log return behavior that takes place during the "forex night" between 19:00 and 3:00 very much resembles what has been seen in AUD/JPY. During the "forex day" between 3:00 and 19:00 CET, EUR/JPY predominantly moves upward. The hourly averages can be as high as 1.5 pips in either direction.

EUR/JPY also seems to be taking a "lunch break" during the hour finishing at 13:00. During this "lunch break", EUR/JPY moves down. This is a multi-year effect. This effect is stronger in EUR/JPY than in AUD/JPY.

Last Updated ( Thursday, 17 February 2011 10:13 )