Markovian approximation in foreign exchange markets

Details Markovian approximation in foreign exchange markets Markovian approximation in foreign exchange markets

1999-03-09

arxiv.org/abs/cond-mat/9903144v1

Physics

Condensed Matter

Statistical Mechanics

19 pages, LaTeX, uses elsart.cls and JournalOfFinance.sty, 7 eps figures, submitted to J. of Int. Money and Finance

Scientific paper

10.1016/S0378-4371(00)00094-7

In this paper we test the random walk hypothesis on the high frequency dataset of the bid--ask Deutschemark/US dollar exchange rate quotes registered by the inter-bank Reuters network over the period October 1, 1992 to September 30, 1993. Then we propose a stochastic model for price variation which is able to describe some important features of the exchange market behavior. Besides the usual correlation analysis we have verified the validity of this model by means of other approaches inspired by information theory . These techniques are not only severe tests of the approximation but also evidence some aspects of the data series which have a clear financial relevance.

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