Thread by @VitruviusCurve

Alpha Seekers - Understanding Path Dependency

Here is an interesting (although heavily contrived) experiment that is very helpful in *actually understanding* path dependency and, done often enough, can lead to some very good ideas.
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Take three markets that, on a close to close basis, tend to have a correlated ‘sign’ (+ or -).

Put another way, all three tend to close in the same direction over time.

Maybe EURUSD, GBPUSD & AUDUSD. What’s intriguing from a research angle is the different paths...
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that they take between the opening and the close. (Or any two points in time really)

Things worth trying to quantify:

* Leads and lags between them.

* Absolute and relative sizes of moves.

* Reactions to ‘X’ time period highs and lows.
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* Is EURUSD more likely to lead because it is ‘more important’ than the AUDUSD.

* If all three move in lockstep with one another is that predictive of anything.

* If one currency plays catchup to the other two late in the session, is that predictive of anything.

And on...
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Not suggesting any of the above have any relationship to anything, rather these are a few things that come to one’s mind straight away as measureable, testable and replicable.

You might pick three stocks in the same sector also.
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Ed. Note- one more dimension lower into the microstructure and it is quite evident to see cross hedging activities by liquidity providers that provide much nourishment for the HFT community (amongst many other morsels).
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