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Multifractal Cross-correlations between foreign exchange rates and interest rate spreads

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  • Li, Jianfeng
  • Lu, Xinsheng
  • Jiang, Wei
  • Petrova, Vanya S.

Abstract

We apply the Multifractal detrended moving average analysis (MF-DMA) and the Multifractal Cross-Correlation Analysis(MFCCA) to study the cross-correlation behaviors between foreign exchange markets and interest rate differentials. Our empirical results obtained from the cross-correlation test, qDCCA coefficient and MFCCA confirm the existence of strong multifractality cross-correlations between foreign exchange rates and interest rate differentials. Foreign exchange rate has a stronger cross-correlation with short-term interest rate differentials in Australia, Canada, Japan, the United Kingdom (UK), and European Union (EU), and with long-term interest rate differentials in China, respectively. The results of rolling window analysis suggest varying cross-correlations between the exchange rates and interest rate differentials during the sample period. In addition, the cross-correlations between exchange rates and interest spreads vary with period, country and maturity of the spreads.

Suggested Citation

  • Li, Jianfeng & Lu, Xinsheng & Jiang, Wei & Petrova, Vanya S., 2021. "Multifractal Cross-correlations between foreign exchange rates and interest rate spreads," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 574(C).
    • Handle: RePEc:eee:phsmap:v:574:y:2021:i:c:s0378437121002557
    DOI: 10.1016/j.physa.2021.125983
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    2. Long, Shaobo & Zhang, Rui & Hao, Jing, 2022. "Asymmetric impact of Sino-US interest rate differentials and economic policy uncertainty ratio on RMB exchange rate," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    3. Tanin, Tauhidul Islam & Sarker, Ashutosh & Brooks, Robert, 2021. "Do currency exchange rates impact gold prices? New evidence from the ongoing COVID-19 period," International Review of Financial Analysis, Elsevier, vol. 77(C).

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