Time-scale dependence of correlations among foreign currencies

TL;DR

This study investigates how correlations among foreign currencies vary across different time scales, revealing strong geographic effects, short time delays, and arbitrage opportunities in currency markets.

Contribution

It provides a detailed analysis of time-scale dependence of currency correlations, highlighting the existence of arbitrage opportunities and differences between direct and indirect exchange rates.

Findings

Strong correlation among geographically close currencies

Time delay of less than a minute in cross-market correlations

Existence of arbitrage opportunities due to rate discrepancies

Abstract

For the purpose of elucidating the correlation among currencies, we analyze daily and high-resolution data of foreign exchange rates. There is strong correlation for pairs of currencies of geographically near countries. We show that there is a time delay of order less than a minute between two currency markets having a strong cross-correlation. The cross-correlation between exchange rates is lower in shorter time scale in any case. As a corollary we notice a kind of contradiction that the direct Yen-Dollar rate significantly differs from the indirect Yen-Dollar rate through Euro in short time scales. This result shows the existence of arbitrage opportunity among currency exchange markets.