Spot foreign exchange market and time series

Details Spot foreign exchange market and time series Spot foreign exchange market and time series

2003-03-04

arxiv.org/abs/cond-mat/0303071v1

Physics

Condensed Matter

Scientific paper

10.1140/epjb/e2003-00249-5

We investigate high frequency price dynamics in foreign exchange market using data from Reuters information system (the dataset has been provided to us by Ols en & Associates). In our analysis we show that a na\"ive approach to the definition of price (for example using the spot midprice) may lead to wrong conclusions on price behavior as for example the presence of short term covariances for returns. For this purpose we introduce an algorithm which only uses the non arbitrage principle to estimate real prices from the spot ones. The new definition leads to returns which are i.i.d. variables and therefore are not affected by spurious correlations. Furthermore, any apparent information (defined by using Shannon entropy) contained in the data disappears.

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