relationship between commodities and currency...
TRANSCRIPT
Relationship Between
Commodities and Currency
Pairs
Derrick Hang
Econ 201FS
April 14, 2010
Agenda
Wrapping up the Bayesian
Commodities and Currency Pairs
◦ Intuition
Data
Volume and Volatility
HAR-RV
Jump Test - Co-Jump Test
Further research
Closure on Previous Analysis
Past analysis attempted to find a useful predictors for
prices of currency pairs in the framework of a Bayesian-
style dynamic linear model in order to improve
portfolio allocations of a basket of currencies
Problems:
◦ Sensitivity to initial values and difficulty in determining/justifying
these values
◦ Complicated and fragile model prone to error and required an
unexpectedly large amount of debug time
◦ Unclear economic intuition behind results, if any
◦ General familiarity with the model/Lack of correlating work
Continuation and Intuition
Retain foreign exchange topic but use other frameworks to assess relationships
Realization: Majority of the currency pairs in my possession are/can be considered “commodity currency”
Hypothesis: Commodity currencies mirror various changes in their respective commodity
Empirically explore these relationship using high-frequency data
Data
5 minute price and volume data for 9 currency pairs, Brent Crude Futures, Comex Gold Futures, SPY
“Oil Currency Pairs”
◦ CAD/USD, NOK/USD
“Gold Currency Pairs”
◦ AUD/USD, NZD/USD, CHF/USD, ZAR/USD
Other pairs
◦ JPY/USD, EUR/USD, GBP/USD
Data from 9:35AM-3:55PM weekdays from Jan – Jun 2009
◦ Exclude Jan 1st, Jan 19th, Feb 16th, Apr 10th, Apr 13th, May 25th due to lack of across-the-board data for those days
Question 1: Relationship between
Currency pair volume and variance
Caveat: Aware of the concerns over the reliability of volume data and interpretation and small window of data:
◦ Called data provider to verify meaning and accuracy; Lack of free fx volume data to check…
Hypothesis: Commodity volatility should be related to respective “commodity currency” volumes as traders want to move to adjust portfolios for risk
Lyons(1994), Admati and Pfleiderer(1988), Easley and O‟Hara (1992): Event-uncertainty theory, hot-potato theory, Analysis of FX: volume begets volume
Question 1: Currency pair volume and
Commodity realized variance
Question 1: Currency pair volume and
Commodity realized variance
Question 1: Currency pair volume and
Commodity realized variance
Question 1: Currency pair volume and
Commodity realized variance
Question 1: Relationship between
Currency pair volume and variance
Can volume be a useful predictor of realized variance of
its respective commodity
Hypothesis: Information about an impending change in
commodity volatility will cause traders to make
adjustments in respective currency
Regress lagged volume of commodity currencies on
realized variance of respective commodity
Question 1: Relationship between
Currency pair volume and variance
Lag 1 Volume on RV of Gold
AUD CHF NZD ZAR GBP CAD
Constant 0.0015 4.7143e-
004
9.8187e-
004
6.9084e-
004
5.8580e-
004
0.0014
Beta -1.1945e-
004
-3.0394e-
005
-7.9778e-
005
-5.5753e-
005
-3.9823e-
005
-1.1294e-
004
F-Test 8.8839 0.3392 3.7435 1.9116 0.5388 6.3431
p-value 0.0035 0.5614 0.0554 0.1694 0.4643 0.0131
R-
squared
0.0689 0.0028 0.0303 0.0157 0.0045 0.0502
Question 1: Relationship between
Currency pair volume and variance
Lag 1 Volume on RV of Oil
CAD NOK GBP AUD
Constant 0.0052 6.2762e-004 5.8344e-004 0.0054
Beta -4.1377e-
004
-9.9115e-
006
-5.9715e-
006
-4.2852e-
004
F-Test 14.7557 0.0051 0.0020 20.2121
p-value 0.0002 0.9430 0.9648 0.0000
R-squared 0.1095 0.0000 0.0000 0.1442
Question 1: Relationship between
Currency pair volume and variance Highest R-squared are for the AUD/USD, NZD/USD, CAD/USD
From a initial search on the Internet, these 3 pairs are the most consistently noted as “currency commodities”
High R-squared in mismatched pair/commodity: Perhaps change in volatility in trade gives traders incentive to adjust other commodity pair to hedge risk
However, in the case of a relationship, across-the-board negative betas seem to support the hot-potato theory IF information about volatility changes are not well-known
Possibility: Perform analysis with higher lag and regress oil and gold on all pairs and correlations between commodity currencies
Question 2: Relationship between
Currency pair & commodity variance
Question: Can volatility in a commodity be a good predictor for volatility in respective „commodity currencies”?
Employ the HAR-RV model
◦ Regress for RV (t+1) of a particular currency pair with its lagged daily RV(t), weekly RV(t-5), and monthly RV(t-22)
◦ Add in HAR-RV regressors for gold
◦ Add in HAR-RV regressors for oil
◦ Compare!
For this presentation, only AUD/USD and CAD/USD are shown for time concerns
Question 2: Relationship between
Currency pair & commodity variance
Question 2: Relationship between
Currency pair & commodity variance
Question 2: Relationship between
Currency pair & commodity variance
Regress for AUD/USD RV* indicates significance at the 5% level
AUD AUD GOLD AUD OIL
Constant 0.0000 0.0000 0.0000
Beta_d 0.4137* 0.4086* 0.0761* 0.3678* 0.0132
Beta_w -0.0537 -0.0371 -0.0329 -0.0586 -0.0041
Beta_m -0.0244 -0.0560 0.0062 -0.1651 0.0298
p-value of
F-test
0.0003 0.0006 0.0007
R-squared 0.1754 0.2213 0.2186
Question 2: Relationship between
Currency pair & commodity variance
Regress for AUD/USD RV* indicates significance at the 5% level
AUD GOLD OIL
Constant 0.0000
Beta_d 0.3785* 0.0708* -0.0002
Beta_w -0.0447 0.0049 -0.0049
Beta_m -0.1695 -0.0380 0.0295
p-value of F-
test
0.0010
R-squared 0.2585
Question 2: Relationship between
Currency pair & commodity variance
Regress for CAD/USD RV* indicates significance at the 5% level
CAD CAD GOLD CAD OIL
Constant 0.0000 0.0000 0.0000
Beta_d 0.1867 0.1871 0.0467* 0.1678 0.0071
Beta_w -0.1108 -0.0508 -0.0295 -0.0938 -0.0090
Beta_m 0.0769 0.0699 -0.0224 0.0462 0.0060
p-value of
F-test
0.1588 0.0268 0.4009
R-squared 0.0523 0.1394 0.0632
Question 2: Relationship between
Currency pair & commodity variance
Regress for CAD/USD RV* indicates significance at the 5% level
CAD GOLD OIL
Constant 0.0000
Beta_d 0.1808 0.0449 -0.0031
Beta_w -0.0458 0.0045 -0.0240
Beta_m 0.0359 -0.0317 0.0062
p-value of F-
test
0.0927
R-squared 0.1478
Question 2: Relationship between
Currency pair & commodity variance Only the lag 1 (daily) regressor is individually significant in
these regressions
◦ Daily Gold on AUD/USD and daily AUD/USD on AUD/USD
◦ Daily Gold on CAD/USD
Significant regressors are all positive in these cases; however immediate intuitive on the relationship is unclear
Notice that CAD/USD regressors were not individually or jointly significant when regressed on CAD/USD and had low r-squared => HAR-RV model may be inadequate due to small window of data or due to uninformative past movements in RV
Question 2: Relationship between
Currency pair & commodity variance
Run HAR-RV using higher sampling frequencies (10 min, 15 min) to calculate daily RV
Run HAR-RV on the commodity RV and SPY RV and look for any relationships
Look for relationships between currency pairs using HAR-RV
Assess the viability of HAR-RV model with the short time window and implications on interpretation outside of this window
Question 3: Currency pair &
commodity co-jumps
Do currency pairs and their respective commodities
jump together?
Hypothesis: I expect to see more instances of co-jumps
between commodity currency and the commodity itself
because I expect macroeconomic announcements that
our revelant to a currency pair to also be relevant to
the respective commodity
Question 3: Currency pair &
commodity co-jumps
Raw analysis: Run the max-adjusted bipower and max-
adjusted tripower BNS Jump tests and Median Jump test
and search for common days declared as jump days
between commodities and currencies at the 5%, 1%, and
0.1% significance levels
Use the correlation statistic from Roeber (1993) to
express standardized jump correlation, where C is
number of common jumps and J are the number of
jumps for each respective currency pair
bababa JJC */,,
Question 3: Currency pair &
commodity co-jumps
Question 3: Currency pair &
commodity co-jumpsCAD NOK AUD
5% Level 3 3 1
Co-Jump Days 09-Jan-2009
12-Jun-2009
17-Jun-2009
09-Jan-2009
14-Jan-2009
24-Jun-2009
04-Jun-2009
1% Level - - 1
Co-Jump Days - - 04-Jun-2009
0.1% Level - - 1
Co-Jump Days - - 04-Jun-2009
Roeber
Coefficient
(5%,1%,0.1%)
0.1309; - ; - 0.1414; - ; - 0.0485; 0.1890;
0.5774
Max
-Adju
sted T
ri-P
ow
er Test
OIL
“C
O-J
UM
PS”
Question 3: Currency pair &
commodity co-jumps
AUD CHF NZD
5% Level 3 9 3
Co-Jump Days 16-Jan
08-May
22-May
14-Jan, 16-Jan, 05-
Mar,25-Mar, 23-
Apr, 08-May, 22-
May, 16-Jun, 23-
Jun
03-Mar
19-May
22-May
1% Level - 3 1
Co-Jump Days - 16-Jan, 23-Apr,
08-May
03-Mar
0.1% Level - 2 -
Co-Jump Days - 23-Apr, 08-May -
Roeber Coef .1328; - ; - 0.3051; 0.2224;
0.3381
0.1054; 0.0772 ; -
Max
-Adju
sted T
ri-P
ow
er Te
st
GO
LD
“C
O-J
UM
PS”
Question 3: Currency pair & commodity co-jumps
ZAR CAD
5% Level 4 3
Co-Jump Days 16-Jan-2009
16-Apr-2009
30-Apr-2009
21-May-2009
09-Jan-2009
12-Jun-2009
17-Jun-2009
1% Level 1 -
Co-Jump Days 21-May-2009 -
0.1% Level - -
Co-Jump Days - -
Roeber Coef 0.2025; 0.1890; - 0.1309 ; - ; -
Max
-Adju
sted T
ri-P
ow
er Te
st
GO
LD
“C
O-J
UM
PS”
Question 3: Currency pair & commodity co-jumps
Question 3: Currency pair &
commodity co-jumps
Question 3: Currency pair &
commodity co-jumps
Question 3: Currency pair &
commodity co-jumps
Question 3: Currency pair &
commodity co-jumps
Question 3: Currency pair &
commodity co-jumps
CHF/USD is the only currency pair that has a common
jump to the 0.1% level with the “correct” commodity
AUD/USD has a co-jump at the 0.1% level with gold
We see a couple of common jump across currency
pairs, but only at the 5% significance level
Question 3: Currency pair &
commodity co-jumps
Check and correct for bugs in code
Implement formalized co-jump tests
Use the Lee-Mykland test outlined in Lee-Mykland(2008) to test for jumps in specific returns
◦ Employed the Lee-Mykland test correction suggested in Jansen & Tauchen (2009)
Use the BNS Co-Jump Test
Focus on one topic? Suggestions.