Correlation patterns in foreign exchange markets

Lasko Basnarkov, Viktor Stojkoski, Zoran Utkovski and Ljupco Kocarev

Physica A: Statistical Mechanics and its Applications, 2019, vol. 525, issue C, 1026-1037

Abstract: The value of an asset in a financial market is given in terms of another asset known as numeraire. The dynamics of the value is non-stationary and hence, to quantify the relationships between different assets, one requires convenient measures such as the means and covariances of the respective log returns. Here, we develop transformation equations for these means and covariances when one changes the numeraire. The results are verified by a thorough empirical analysis capturing the dynamics of numerous assets in a foreign exchange market. We show that the partial correlations between pairs of assets are invariant under the change of the numeraire. This observable quantifies the relationship between two assets, while the influence of the rest is removed. As such the partial correlations uncover intriguing observations which may not be easily noticed in the ordinary correlation analysis.

Keywords: Foreign exchange; Financial cross-correlations; Numeraire selection; Portfolio management; Partial correlations; Correlation networks (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437119303887
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
Working Paper: Correlation Patterns in Foreign Exchange Markets (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:525:y:2019:i:c:p:1026-1037

DOI: 10.1016/j.physa.2019.04.044

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().