Forex glossary
Currency Pair Correlation
Correlation measures the strength and direction of a relationship between two series, such as currency-pair returns. Pearson's coefficient ranges from −1 to +1 and measures linear association. A value near zero does not exclude nonlinear dependence; estimates depend on sample and frequency.
Illustrative example
How does it work in practice?
In a hypothetical sample, daily returns of two pairs have correlation +0.8, then +0.2 in another sample. The first figure shows stronger linear association within its window, not a permanent relationship.
A case to work through
Incompatible observation windows
Model: report A uses hourly prices over a month; B uses daily returns over a year.
- Series type, frequency and window all differ.
- First calculate both coefficients from consistently defined data.
What follows? Do not attribute the difference solely to changed currency relationships.
Example boundary: A consistent sample still cannot guarantee a stable future relationship.
A useful distinction
Currency Pair Correlation / Diversification
Diversification constructs a portfolio; correlation describes one aspect of its components.
Check your understanding
Check data consistency before comparing correlations.
Show the answer and explanation
Series type, frequency and window
All three changes affect interpretation.
From position budgets to portfolios
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Related terms
Sources and documentation
- BIS MAR10: market risk terminology
VaR at a stated horizon/confidence and expected shortfall as a tail mean.
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