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Foreign exchange markets: Price response and spread impact

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  • Henao-Londono, Juan C.
  • Guhr, Thomas

Abstract

We carry out a detailed large-scale data analysis of price response functions in the spot foreign exchange market for different years and different time scales. Such response functions provide quantitative information on the deviation from Markovian behavior. The price response functions show an increase to a maximum followed by a slow decrease as the time lag grows, in trade time scale and in physical time scale, for all analyzed years. Furthermore, we use a price increment point (pip) bid–ask spread definition to group different foreign exchange pairs and analyze the impact of the bid–ask spread in the price response functions. We find that large pip bid–ask spreads have a stronger impact on the response. This is similar to what has been found in stock markets.

Suggested Citation

  • Henao-Londono, Juan C. & Guhr, Thomas, 2022. "Foreign exchange markets: Price response and spread impact," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 589(C).
    • Handle: RePEc:eee:phsmap:v:589:y:2022:i:c:s0378437121008591
    DOI: 10.1016/j.physa.2021.126587
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