Changing the Base Currency of the Correlation Matrix
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Document ID: 1997-352 (previously 1997/017)
Published on: 1st August 1997
Author: David Carruthers
The note illustrates how cross currency correlations could be calculated when the base currency is switched. Implicit assumptions made are that log returns in each economy are all normally distributed and linearly related so that correlation is a sound measure of their interdependence. Moreover, it is assumed that the markets don’t permit triangular arbitrage. See the more recent note mentioned below for a slightly more generalised treatment.
