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Arbitrage Pressure, Positive Feedback Speculation, Selective Hedging, and Economic Stability: An Empirical Analysis and Catastrophe Modelling

In: Microeconomic Risk Management and Macroeconomic Stability

Author

Listed:
  • Andreas Röthig

    (Darmstadt University of Technology)

Abstract

This chapter studies nonlinearities and complexity in currency futures markets. First, the impact of price changes on trading volume is empirically investigated using linear vector autoregression analysis and nonlinear logistic smooth transition regression analysis. Second, the empirical findings regarding nonlinearities in traders’ behavior, together with economic theory concerning arbitrage pressure and noise trading, are modelled in a cusp catastrophe model. There is a large body of literature dealing with nonlinearities in financial markets.1 These studies generally analyze nonlinearities in prices due to inefficient arbitrage and the existence of noise traders.2 The empirical study in this chapter differs considerably from the one chosen in the studies mentioned above, since it focusses on nonlinearities in the responses of the quantity of trading volume to price changes. The empirical investigation follows Röthig and Chiarella (2007), and applies the logistic smooth transition regression (LSTR) model to investigate the impact of changes of currency futures settlement prices on the trading positions of futures traders. Smooth transition regression models have been widely used in a range of different fields of research, including stock market returns, exchange rates and interest rates3, monetary economics4, GDP growth5, business cycles6, and for modelling phenomena like El Niño.7

Suggested Citation

  • Andreas Röthig, 2009. "Arbitrage Pressure, Positive Feedback Speculation, Selective Hedging, and Economic Stability: An Empirical Analysis and Catastrophe Modelling," Lecture Notes in Economics and Mathematical Systems, in: Microeconomic Risk Management and Macroeconomic Stability, chapter 0, pages 87-119, Springer.
    • Handle: RePEc:spr:lnechp:978-3-642-01565-6_5
    DOI: 10.1007/978-3-642-01565-6_5
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