Relationship Between Commodities and Currency Pairspublic.econ.duke.edu/~get/browse/courses/201/spr11...Apr 14, 2010 · April 14, 2010. Agenda ... Exclude Jan 1st, Jan 19 th, Feb

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









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



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



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


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


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







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



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



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



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


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



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


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 */,,


commodity co-jumps


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

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er Test

OIL

“C

O-J

UM

PS”


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

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GO

LD

“C

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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

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GO

LD

“C

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UM

PS”

Question 3: Currency pair & commodity co-jumps


commodity co-jumps


commodity co-jumps


commodity co-jumps


commodity co-jumps


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


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.

Documents

Relationship Between Commodities and Currency Pairspublic.econ.duke.edu/~get/browse/courses/201/spr11...Apr 14, 2010 · April 14, 2010. Agenda ... Exclude Jan 1st, Jan 19 th, Feb