Dynamic Cross-Correlations Analysis on Economic Policy Uncertainty and US Dollar Exchange Rate: AMF-DCCA Perspective

Ruwei Zhao,Yian Cui,Giancarlo Consolo

doi:10.1155/2021/6668912

Abstract

In this paper, we employ the multifractal detrended cross-correlation analysis (MF-DCCA) as the measurement instrument for the dynamic cross-correlation inspection between US economic policy uncertainty (EPU) index and US dollar exchange rate return (Ret). By calculating the cross-correlation statistics, we find mild acceptance of cross-correlation between EPU and Ret qualitatively. With further application of MF-DCCA methodology, we find strong power law cross-correlation existence within all scaling orders. Also, apparent persistence of cross-correlation has been discovered with significant Hurst exponents of all orders. Besides, we find that long-term cross-correlation demonstrates more persistence and higher degree of multifractality than those in the short term. Finally, we utilize the rolling window and binominal measurement analysis as revisits of the model. The results are consistent with model statements.

Highlights

It is well documented that macro factors demonstrate powerful influence in pricing financial assets, such as stocks and bonds [1,2,3]
Zhang et al [25] carried out a study regarding the correlation between media news and stock market index return with multifractal detrended cross-correlation analysis (MF-detrended cross-correlation analysis (DCCA)) approach. ey found quantitative evidence for the cross-correlation multifractality existence between media news and SSE 50 index return. ey further conducted the rolling window analysis, and the results show that scaling exponents are all above critical values, showing strong evidence of multifractality persistence between media news and index return
We investigate whether multifractal crosscorrelation between economic policy uncertainty and US dollar index exists with the application of multifractal detrended cross-correlation analysis (MF-DCCA)

Summary

Introduction

It is well documented that macro factors demonstrate powerful influence in pricing financial assets, such as stocks and bonds [1,2,3]. To have a better observation of economic policy fluctuation in a quantitative way, Baker et al [4] develop the novel economic policy uncertainty index with the retrieval of mainstream newspapers, which is widely employed in the financial academic field [5,6,7,8,9,10,11,12,13,14,15,16,17,18,19,20,21,22] With this view, we connect the prevailing economic policy uncertainty index with US dollar, the world’s largest trading currency, to check if US macro policy adjustment would shed light on the fluctuation of US dollar exchange rate. For the option-to-stock volume ratio, no significant cross-correlation was detected

Methods

Results

Conclusion