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Lead–Lag Relationship Using a Stop-and-Reverse-MinMax Process

Author

Listed:
  • Stanislaus Maier-Paape

    () (Institut für Mathematik, RWTH Aachen, Templergraben 55, D-52062 Aachen, Germany
    These authors contributed equally to this work.)

  • Andreas Platen

    () (Institut für Mathematik, RWTH Aachen, Templergraben 55, D-52062 Aachen, Germany
    These authors contributed equally to this work.)

Abstract

The intermarket analysis, in particular the lead–lag relationship, plays an important role within financial markets. Therefore, a mathematical approach to be able to find interrelations between the price development of two different financial instruments is developed in this paper. Computing the differences of the relative positions of relevant local extrema of two charts, i.e., the local phase shifts of these price developments, gives us an empirical distribution on the unit circle. With the aid of directional statistics, such angular distributions are studied for many pairs of markets. It is shown that there are several very strongly correlated financial instruments in the field of foreign exchange, commodities and indexes. In some cases, one of the two markets is significantly ahead with respect to the relevant local extrema, i.e., there is a phase shift unequal to zero between them.

Suggested Citation

  • Stanislaus Maier-Paape & Andreas Platen, 2016. "Lead–Lag Relationship Using a Stop-and-Reverse-MinMax Process," Risks, MDPI, Open Access Journal, vol. 4(3), pages 1-20, July.
  • Handle: RePEc:gam:jrisks:v:4:y:2016:i:3:p:27-:d:73452
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    lead–lag relationship; intermarket analysis; local extrema; empirical distribution;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • K2 - Law and Economics - - Regulation and Business Law

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