DYNAMICIMPACTOFFOREIGNEXCHANGETRADINGVOLUMEONFOREIGNEXCHANGEVOLATILITY

JongWooKangandCarlosCabaero

NO.768

February2025

ADBECONOMICSWORKINGPAPERSERIES

ASIANDEVELOPMENTBANK

ADBEconomicsWorkingPaperSeries

DynamicImpactofForeignExchangeTradingVolumeonForeignExchangeVolatility

JongWooKangandCarlosCabaeroNo.768|February2025

JongWooKang

(jkang@)

isthedirectorofRegionalCooperationandIntegrationDivisionandCarlosCabaero

(ccabaero.consultant@)

isaconsultantattheEconomicResearchandDevelopmentImpactDepartment,AsianDevelopmentBank.

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ABSTRACT

Foreignexchange(FX)tradingvolumeisakeyfactorinexchangeratevolatility.Giventheimportantroleofvolatilityineconomicgrowthandstability,thispaperinvestigatesthedynamicnatureofexchangetradingvolumeonexchangeratevolatilityusinghourlyhigh-frequencydata.Theestimationresultsfromordinaryleastsquares,fixedeffectsandthegeneralautoregressiveconditionalheteroskedasticitymodelpointtoasignificantimpactofthird-partyforeignexchangetradevolumesontheFXvolatilitiesoforiginalcurrencypairs.TheUnitedStatesdollar(USD),asthedominantcurrency,exertssizeableeffectthroughthisthird-partychannelandthemagnitudeoftheforeignexchangetradingvolumeturnsouttobeacrucialfactortothiseffect.However,third-partycurrencypairswithoutUSDlinkagesalsoexertnon-negligibleimpact,callingforrenewedattentiontotheeffectivenessofregionalfinancialcooperationinmitigatingexchangeratevolatilityascomparedwithmajorforeignexchangetradingpartners,notonlythroughdirecttransactionmechanismsbutthroughthirdpartycurrencychannels.

Keywords:FXvolatility,thirdpartychannel,GARCHmodel

JELcodes:F31,G15,G18

Introduction

Theimpactofexchangeratemovementoneconomicgrowth,development,andstabilityiswell-documented.Muchoftheliteraturepositsthatexchangeratesaffectinternationaltradeperformance,includingthroughexport/importcompetitiveness,volumes,andprices,aswellasbusinesses’externalfinancingcosts.Consequently,changesinexchangeratesaffectforeignanddomesticconsumption,productivity,andinvestment.Giventhesesignificantimpacts,privateandpublicentitiesalikemustcarefullymonitorandprepareforexchangeratemovements.

Theliteraturehasshowntheimpactofexchangeratesonmultipledevelopmentandmacroeconomicindicators.Eichengreen(2007)framesforeignexchangeratesasavitalfacilitatingconditionforeconomicgrowth.Developmentexperiencesinhigh-growtheconomies,suchasinEastAsia,anddevelopingeconomiesdemonstratethatcompetitiveexchangeratesarecriticalinjumpstartinggrowth.Anefficientexchangeratemechanismencouragesefficientredeploymentofresourcestoproductivesectors,thusunlockinggainsinproductivity.Studiescoveringmultipleeconomiesacrosstheglobeaffirmthis,particularlythatundervaluationofacurrencyagainstforeigncounterpartsisoftenaccompaniedbygrossdomesticproduct(GDP)growth(Rodrik2008,SerajandCoskuner2021).InastudyfocusingonIndia,ShaikandRao(2020)statethatthedepreciationoftheIndianrupeeisassociatedwithanincreaseinthecountry’sforeignexchangereservesandinrealGDP.Zhao(2020)showsthatexchangerateshaveadirecteffectonthepricesandcostsofcommodities,alsoimpactingexportstoforeignmarkets.Furtherresearchshowsthatexchangeratesimpactproductivityandforeigntourism.Fluctuationsintheexchangeratemayinfluenceeconomicpolicy,particularlyineconomiesadoptinginflation-targetingregimes,whileharmingeconomicgrowth.

Exchangerateshavesignificantimpactoninternationaltrade,asnoted.Exchangerateshaveasizableeffectontheimportandexportcostsofproducts.Whenaneconomy’scurrencyisvaluedhigher,productsfromforeignmarketsbecomecheaper,thusencouraginggreaterimportation.Conversely,undervaluedcurrenciesfacilitatelowerpricesforaneconomy’scommoditiesandleadtogreaterproductexportation.Thus,movementsintheexchangeratealsoaffectaneconomy’stradebalance;ahigherexchangeratemovestowardsanegativetradeaccountbalance,whilealowerexchangerateleadstoapositivebalance,althoughthegrowingcomplexitiesassociatedwithdeepeningglobalvaluechainstendtocompoundthislinearrelationship.Thestrengthofthisrelationshiphasbeenwidelystudiedintheliterature,withvaryingresults.Researchondevelopedanddevelopingcountries(Kang2016)aftertheglobalfinancialcrisisshowthattheeffectofcurrencydevaluationonexportgrowthpost-crisishasnotbeenas

PAGE

27

strongasbeforethecrisis.Furtherresearchpositsthatanincreaseinthenumberofeconomiesthatengageindeepercurrencydevaluationmayleadtosluggishgrowthininternationaltrade.

Thus,greatimportancehasbeenplacedinunderstandingexchangeratemovements,particularlythroughtheconceptofexchangeratevolatility.Exchangeratevolatilityisdefinedastheriskassociatedwithunexpectedmovementsinexchangerates(Ozturk2006).Therepresentativeindicatorofexchangeratevolatilityisthedegreeofvarianceinanexchangerateoveracertainperiod.Pricemovementsoriginatefromanevents-basedapproach,suchaspolitical-economicnewsandannouncements,thatinformsdecisionsofeconomicactors,bothpublicandprivate.Otherfactorslikecomparativeinflationandinterestratedifferentialsbetweeneconomieslikewiseleadtoexchangeratevolatility.

Asidefrommacroeconomicsandinternationaltrade,exchangeratevolatilityisconsequentialforfirmsandtraders,whichcouldbeexposedtosizeableexchangeraterisksintheirfinancingcostsandfinancialmanagement.Volatileforeignexchangemarketsleadtogreatermarketuncertainty,whichimpactscostsandrevenuesforfirmsandinturninformshedgingandinvestmentstrategies.Furthermore,avolatileexchangerateincreasesuncertaintyintheforeignexchangemarketanddiscouragesrisk-aversetradersfromengagingininvestments,leadingtochangesininvestorportfolioflows(Flores-Sosa,Aviles-Ochoa,andMerigo2023).

Giventheinfluenceofexchangeratesoneconomicgrowthandtrade,maintainingastableandpredictableexchangeratehasbeenaconstantpriorityofsovereignfinancialauthoritiesacrosstheglobe.Boththesourcesandimplicationsofexchangeratevolatilityhavebeenkeyareasofeconomicresearch.Findingsgenerallyshowthathigherexchangeratevolatilityleadstohighercostsforrisk-aversetraders,aswellaslowerforeigntrade.Thisisduetochangesinthevalueoftheexchangerateupontheagreementofacontractversusitsactualpaymentandimplementation.Whenexchangeratesbecomevolatile,uncertaintyrisesinpredictingthecostsandtherebytheprofitsfromtransactions,whichdisincentivizestrade(HooperandKolhagen1978).Despitethis,otherresearchershavebeenlessdefiniteabouttheimpactofexchangeratevolatilityoninternationaltrade.DeGrauwe(1988),forexample,positsthatdominanceofincomeeffectsoversubstitutioneffectsmayleadtoapositiverelationshipbetweenvolatilityandtrade.Inthistheory,anincreaseinexchangeratevolatilitycouldraisethemarginalutilityofexportrevenueintheeyesofsufficientlyrisk-averseexportersandcouldinduceincreasedexports.DeGrauwethussuggeststhattheeffectofexchangeratevolatilitydependsonthedegreeofriskaversionofmarketplayers.

Numerouseffortshavebeenmadetostudyexchangeratevolatility.Asitisnotadirectlyobservablephenomenon,extensiveresearchhasbeencarriedouttopredictmovementsintheexchangerates,aswellastoidentifycauses,andpossibleindicatorsofexchangeratevolatility.Theliteratureidentifieseconomicfundamentals,suchasinflation,interestrates,andbalanceofpaymentsassourcesofexchangeratevolatility,especiallyasthesefactorsthemselveshavebecomemorevolatilesincethe1980s.Furthermore,factorssuchascapitalaccountliberalization,technologicalinnovation,andcurrencyspeculationallcontributetoincreasedcross-borderflowsandtradevolumes,addingtoexchangeratevolatility(HookandBoon2000).Oneofthekeyfactorsaffectingexchangeratevolatilityisforeignexchangetradingvolume,whichisusedasameasureofthestateoftheforeignexchangemarket.Foreignexchangetradingisessentialtoengagingininternationaltradeasitallowstradersandfirmsaliketoconvertdomesticcurrencyintoforeigncurrencyandviceversatobeabletotransactwithexternalmarkets.Tradersoftenstudymovementintheforexmarketandcarryouttradesbasedontheirvaluationofvariouscurrenciestomakeaprofit.Thus,fluctuationsinforextradingvolumearealsousedtostudyandpredicatethedegreeofforeignexchangevolatilitybetweencurrencies.Thisplacesaclearimpetusinunderstandingtherelationshipbetweenforeignexchangevolatilityandtradingvolumes.Foreignexchangetradescanalsobeinfluencedbythefirm’smotivestominimizelossesfromexchangeratevolatilityindeterminingthetimingofexchangesforforeignborrowingorrepayment,andtheincentivestohedgeagainstexchangeratevolatilityrisks.

Therelationshipbetweenforeignexchangevolatilityandforeignexchangetradingvolumeshasbeenexploredintheliterature.Foreignexchangetradingvolumeisregardedasaproxyforunobservablemarketconditions,suchasrelativeliquidityandprivatelyinformedtrading(Gargano,Riddiough,andSarno2018).Volatilitytendstomoveinconjunctionwithtradingvolumes,inthatasteepincreaseintradingvolumesoftencoincideswithmorevolatileforeignexchangecurrencies(Figureonpage4).Varioustheoreticalexplanationsaimtoexplainthis.Copeland(1976,1997)presentedthemodelof“sequentialinformationarrival,”whereintradingparticipantsreacttoinformationonthefinancialmarketindividually.Theirreactiontothearrivalofthenewstherebyshiftstheirdemandcurveforaparticularcurrency.Thesetradesthenactasaproxyfortraders’changingdemandforaparticularcurrency,andthuscoincidewithincreasedvolatilityintheforeignexchangemarket.Anotherexplanationforthisphenomenonisthe“mixtureofdistributionshypothesis”proposedbyClark(1973).Underthistheory,volatilityandvolumearedeterminedbyacommon,unobservablefactorthatreflectsthearrivalofnewinformationintheforeignexchangetradingmarket.Howtradersinternalizethisinformationchangesthepricingofaparticularcurrency,thusencouragingahighernumberoftrades.Thesetradesthereforesignify

disagreementsbetweentradersonthepricingofaparticularforeignexchangecurrencyandmorevolatilepricemovement.

12

10

8

6

4

2

0

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Averageofvolatility

Averageofvolume,USD-JPY

Averagedailyvolatility

Billions(USD-JPY)

Figure:USD-JPYVolatilityandTradingVolumesforMay2023

USD-JPY=USdollar-Japaneseyencurrencypair.

Notes:Valuesabovearethedailyaverageofthehourlyvolatilityrates.Thehourlyvolatilityratesarecalculatedastheabsolutesumofthe5-minuteintervalpricechangeofacurrencypairwithinanhour,reflectedasapercentageoftheexchangerate.

Sources:AsianDevelopmentBankcalculationsusingdatafromBloombergandtheCLSFXdatabases.

SensoyandSerdengecty(2019)exploretheviabilityoftheMixedDistributionhypothesisbyinvestigatingtherelationshipbetweenUSD-TRY(Turkishlira)volatilityandforeignexchangetradevolumesbycurrencytradeandcounterpart.TheirresultsusedageneralizedmethodofmomentsframeworktoestablishapositivecontemporaneousrelationshipbetweenUSD-TRYexchangevolatilityandtradevolumesinthespotmarket.TheresearchfurthershowedthatthedispersionoftraderbeliefsonthefutureUSD-TRYexchangeratesignificantlyincreasesthepositiverelationshipbetweenvolatilityandtradingvolume,strengtheningthehypothesisthatthejointmovementoftwovariablesareexplainedbytradeuncertaintyanddisagreementinforeignexchangeratepredictions.Galati(2000)likewiseexplorestheeffectoflocalcurrenciesindevelopingeconomiesusingordinaryleastsquares(OLS)regressionwithageneralautoregressiveconditionalheteroskedasticity(GARCH)component,distinguishingexpectedandunexpectedchangesintradevolume.Theresultsshowedapositivesignificantrelationshipbetweenforeignexchangevolatilityandvolumesforfouroutofthesixcurrenciesexamined.

InAsia,monitoringandmanagingexchangeratevolatilityliesatthecoreofeconomicpolicyobjectivesoffinanceandcentralbankauthorities,givenitsdeepandbroadeconomy-wideimpacts.Animportantinstrumentthataccompaniestradetransactionsisthecurrencyusedininvoicinginternationaltradedeals.Researchhasshownthatinthisregard,somecurrenciesleverageamuchstrongereffectthanothersinaffectinginternationaltradeand,consequently,exchangeratevolatility.Mercado,Jacildo,andBasuDas(2022)explorethisbyassessingthecovariationbetweenglobalvaluechainsandmultinationals’activitiesbasedontheUSdollarshareintradeinvoicingforeconomiesinAsiaandthePacific.ThepaperemphasizesthepresenceoftheUSdollarasthedominant“vehiclecurrency”ininternationaltradetransactions,constitutingabout40%ofallinternationaltradeinvoicing(and80%intheAsianregion).ThepresenceofaUSdollar-leddominantcurrencyparadigmhasseveralimplications.First,adepreciationinalocaleconomy’scurrencywillhaveamoremutedimpactonloweringimportpricesanddemand.ThisisattributedtothelocalcurrencypricesoftradingpartnersremainingunchangedbecauseofasteadyexchangeratewiththeUSdollar.Bythesamelogic,thedepreciationofdomesticcurrencyundersuchaparadigmweakenstradeeffectssuchaslowerimportsandhigherexports.Second,underaUSdollar-leddominantcurrencyparadigm,moreexchangeratemovementwouldbenecessarytosignificantlyaffectnear-termexternaladjustmentsintrade,particularlyforimportingeconomies.Thiswouldleadtohigherinflationalongsidethepossibletighteningofmacroeconomicpoliciesintheeconomy.TheseimplicationsareparticularlyimportantintheAsianregion,astheresearchshowsthateconomieswithintheregionthathavehigherglobalvaluechainparticipationalsohaveahighershareofexportsandimportsinvoicedinUSdollarscomparedtononregionaleconomies.ThisfindinghighlightstheneedtostrengthenregionaltradeandexposureandcooperationamongeconomiesinAsiaandthePacific.Thisbringshomesignificantimplications,asnotonlyareAsianeconomiesmoresusceptibletodisruptionsintheUSfinancialsystem,theyalsohavetoendeavormoretoinfluencetradetocurbgreaterexchangeratevolatility.AstudybyParketal.(2022)thatinvestigatedtheimpactofUSpolicyuncertaintyusinganews-basedmonetarypolicyuncertaintyindicatorsupportsthenotionthathigherUSmonetarypolicyuncertaintyhadasignificanteffectontheexchangeratevolatilityofvariouseconomiesinAsiaandthePacific.Againstthisbackground,thereisaneedtostrengthenregionalcooperationintradeandfinancialpolicytobettermitigateexchangeratevolatility.

WhileitisacknowledgedthattheUSdollar,astheworld’sreservecurrency,isthedominantcurrencyintheforeignexchangemarket,Asiancross-currencytradevolumesmayalsohaveahandinaffectingforeignexchangevolatilitywithintheregionamidprogressindeepening

economicintegrationandinterdependencyacrosstheregion.ThishasvitalimplicationsinthatifforeignexchangetradingvolumesbetweenAsianeconomiescorrelatewithavolatileforeignexchangemarketintheregion,itgivesastrongrationaleforeconomicauthoritiesinAsiatoengageingreatercooperationtostabilizetheirforeignexchangevolatilities.

However,itisworthnotingthattherearegapsintheliteratureexploringtherelationshipbetweenforeignexchangevolatilityandtradingvolumes.Oneisthelimitednumberofstudiesthatusehigh-frequencydata,aspapersthatcoverthetopicgenerallyonlyhadaccesstodailydatafortheprominentlyusedcurrencies.Anotherkeygapisthelackofstudiesthatexaminetheeffectofathird-partycurrencyinatripartiterelationshipofthreeeconomies.Thelattergapisofinterestasthisisinstrumentalindeterminingwhethertheexchangeratevolatilityofaparticulardomesticeconomycanstillbeaffectedbyathird-partycurrency,despitetheimpactofadominantcurrencysuchastheUSdollar.

Thispaperaddstothebodyofknowledgeonforeignexchangevolatilityandtradevolumesbyinvestigatingwhetherotherthird-partycurrencytrades,throughtheirrespectivetradevolumes,canhaveatangibleeffectonadomesticeconomy’sexchangeratebeyondwhatisexertedbytheUSdollar.Thepaperhypothesizesthatthird-partytradevolumesalsohaveasignificanteffectonforeignexchangevolatility,ifnotstrongerthantheUSdollar.TestingthishypothesiscanprovideusefulinformationtounderpindeeperandmoremeaningfulexchangesofinformationandmarketinterventionsamongtheAsianeconomies.

Thisresearchfillsthegapinexistingdiscussionsonforeignexchangevolatilityandtradevolumesbyinvestigatingtheeffectofthird-partycurrenciesandbyusinghigh-frequency,hourlydataonforeignexchangetradingvolumes.Thisenrichesthediscourseonthetopic,whichtendstocovertheeffectoftradingvolumesoneachcountry’sownforeignexchangecurrencypair.Asanexample,Khemiri(2012)employsaseriesofGARCHmodelsandMarkovswitchingGARCHmodelstoestimatetherelationshipofvolumeandvolatilityintheUSD-DEM(Deutschemark)marketusingalimiteddealerdataset.MougoueandAggarwal(2011)likewiseexplorethedynamicsbetweenvolumeandvolatilityusingdailytradingvolumereturnsandFXpricesfrom1977–2009fortheUSD-GBP(poundsterling),USD-JPY(yen),andUSD-CAD(Canadiandollar)currencypairsusingbothlinearandnonlinearGrangercausalitytests.Toourknowledge,however,littlehasbeendoneininvestigatingtheimpactofthird-currencychannelsonexchangeratevolatilityusinghighfrequencydata.

SectionIIpresentsdataandestimationmethodologyusedfortheanalysis.SectionIIIdiscussestheresultsoftheanalysisandsectionIVconcludesbydiscussingtheimplicationsforpolicymakers.

DataandEmpiricalMethodology

Data

Oneofthedifficultiesofstudyingforeignexchangevolumedataisthattheforeignexchangemarketishighlydecentralizedacrossseveralplatformsandmarketsintheworld.Furthermore,high-frequencyforeignexchangedataisoftenconsideredproprietary,emphasizingtheneedtofindadatabasethatcansufficientlyproxyforglobalforeignexchangetradingoperations.ThispaperusesdataonhourlyforeignexchangetradevolumefromtheCLSdatabase.Thisdatabaseisthelargestsourceofexecutedforeignexchangedataavailableinthemarketandcoversover3billionforeignexchangetradesfrom2011,whichaccountsforover50%oftotaltradesintheCLSsettlementplatform.TradevolumedataismatchedwiththehourlyforeignexchangevolatilitydatacollectedfromtheBloombergdatabasetoexploretherelationshipbetweenexchangeratevolatilityandtradevolumeunderahighfrequencyframework.

Thepaperexaminesthedynamicsbetweentwotripartiterelationships,theUSD-JPY-AUDandtheUSD-JPY-NZD.

1

ThesewerechosenastheyareAsiaandPacific(Oceanic)economiesthathavecompletedocumentationofforeignexchangetradevolumesfromtheCLSdatabase.

Table1summarizesthestatisticsofhourlyforeignexchangevolatilities,from1Mayto31May2023.Thehourlyvolatilityratesarecalculatedastheabsolutesumofthe5-minuteintervalpricechangeofacurrencypairwithinanhour,reflectedasapercentageoftheexchangerate.Thus,theforeignexchangeratevolatilitydescribesthepercentchangeoftheexchangeratearoundanhourlypriceaverage.ThetwocurrencypairswiththehighestforeignexchangevolatilitiesareNZD-JPYandJPY-AUD,respectively.ThesearefollowedbyNZD-USD,AUD-USD,andUSD-JPYrespectively.ItisofnotethatcurrencypairsthatincludedtheUSDwererelativelymorestablethanthosethatdidnot.

1AUD=AustraliandollarandNZD=NewZealanddollar.

Table1:SummaryStatisticsofHourlyForeignExchangeVolatilityfrom1–31May2023

(%ofexchangerateprice)

CurrencyPair

Observations

Mean(%)

Minimum(%)

Maximum(%)

AUD-USD

552

8.82

1.07

56.66

JPY-AUD

552

9.62

3.04

37.80

NZD-JPY

552

10.02

2.26

76.13

NZD-USD

552

9.32

1.33

76.82

USD-JPY

552

7.83

1.42

41.15

Source:Authors’calculationsusingtheBloombergdatabase.

Table2showsthedataonhourlyforeignexchangetradevolumefromthesamedaterangeasthepreviousfigures.Onaverage,thecurrencypairswiththelargesthourlytradevolumeareUSD-JPY,followedbyAUD-USD,andNZD-USD.Thedataseemstofollowadistinctpattern,inthatcurrencypairswithagreatertradevolumehaverelativelylessvolatileforeignexchangerates.

Table2:SummaryStatisticsofHourlyTradeVolumefrom1–31May2023

CurrencyPair

Observations

Mean

Minimum

Maximum

AUDUSD

552

1.01e+09

2.44e+07

5.32e+09

JPYAUD

552

1.24e+08

221109.3

8.82e+08

NZDJPY

552

2.91e+07

0

2.47e+08

NZDUSD

552

4.52e+08

3003438

4.06e+09

USDJPY

552

2.98e+09

7907000

1.73e+10

Note:0minimumvalueinNZD-JPYisuniformlyfoundonhour1ofeveryMondayofthesampleSource:Authors’calculationsusingtheCLSDatabase.

Tables3and4depictthecorrelationmatrixesbetweenthevolatilitiesandtradingvolumesforeachofthetrilateralrelationship.ThecaseoftheUSD-AUD-JPYtrilateralshowsthatallthecurrencyvolatilitiesmovetogetherwithforeignexchangetradingvolumes.AUD-USDvolatilityhasthehighestcorrelationwithAUD-USDtradingvolumes,followedbyJPY-AUDandUSD-JPYvolumes.JPY-AUDvolatilitylikewisecorrespondsthestrongestwithJPY-AUDtradingvolumesbutisfollowedmorecloselybytradingvolumesofAUD-USDandUSD-JPY.TheforeignexchangevolatilityofUSD-JPY,ontheotherhand,correlatesstronglywithUSD-JPYtradingvolumes,whichhavearelativelystrongereffectthantradingvolumesofAUD-USDandJPY-AUD.

ThecorrelationmatrixfortheUSD-NZD-JPYtrilateralbroadlyfollowsthesametrend,inthatallcurrencyvolatilitiesalsocorrelatepositivelywithtradingvolumes.USD-JPYvolatilityexhibitsthestrongestpositivecorrelationwithUSD-JPYtradingvolumes,trailedsignificantlybyNZD-USDandNZD-JPYtradingvolumes.Likewise,NZD-USDvolatilitycorrelatesstronglywithNZD-USDtradingvolumes,thoughcorrelationswithNZD-JPYandUSD-JPYarenotfarbehind.Theonly

divergentcaseisNZD-JPYvolatility,whereinthestrongestcorrelationiswithNZD-USDtradingvolumes,followedcloselybythatofNZD-JPYandUSD-JPY.

Initialinsightsfromthesematrixesdemonstrateastrongpositivecorrelationbetweenforeignexchangevolatilitiesandtradingvolumes.Forthemostpart,acurrencypair’svolatilitycorrelatesstrongestwithitsowntradingvolumes.Initialevidencealsosuggeststhatthesizeofthecurrencypair’stradingmarketdeterminesthestrengthofcorrelationcomparedtotradingvolumesofothercurrencypairs.Asanexample,thecorrelationcoefficientsofNZD-JPYvolatilityaremorecloselyclusteredtogethercomparedtothatofUSD-JPYvolatility.Appendix1depictsavisualizationofthesevariouscorrelations.

Table3:CorrelationMatrixforUSD-AUD-JPYVolatilityandTradingVolumes

Volatility

Volatility

Volatility

Volume

Volume

Volume

AUDUSD

JPYAUD

USDJPY

AUDJPY

AUDUSD

USDJPY

Volatility

AUDUSD

1

Volatility

JPYAUD

0.83

1

Volatility

USDJPY

0.65

0.74

1

Volume

AUDJPY

0.65

0.69

0.49

1

Volume

AUDUSD

0.73

0.67

0.57

0.64

1

Volume

USDJPY

0.64

0.67

0.78

0.58

0.76

1

Sources:Au