Indeterminacy in foreign exchange market

Details Indeterminacy in foreign exchange market Indeterminacy in foreign exchange market

1999-06-23

arxiv.org/abs/cond-mat/9906343v1

Physics

Condensed Matter

Statistical Mechanics

11 pages, LaTeX2e, uses epsfig.sty, 3 eps figures, submitted to Journal of Business

Scientific paper

10.1016/S0378-4371(99)00589-0

We discuss price variations distributions in foreign exchange markets, characterizing them both in calendar and business time frameworks. The price dynamics is found to be the result of two distinct processes, a multi-variance diffusion and an error process. The presence of the latter, which dominates at short time scales, leads to indeterminacy principle in finance. Furthermore, dynamics does not allow for a scheme based on independent probability distributions, since volatility exhibits a strong correlation even at the shortest time scales.

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