Relationship Between Commodities and Currency...
Transcript of Relationship Between Commodities and Currency...
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.