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Indeterminacy in foreign exchange market

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  • Michele Pasquini

    (I.N.F.M. and Dip. di Matematica, Universit\`a dell'Aquila, Italy)

  • Maurizio Serva

    (I.N.F.M. and Dip. di Matematica, Universit\`a dell'Aquila, Italy)

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    Abstract

    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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    File URL: http://arxiv.org/pdf/cond-mat/9906343
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    Paper provided by arXiv.org in its series Papers with number cond-mat/9906343.

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    Date of creation: Jun 1999
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    Handle: RePEc:arx:papers:cond-mat/9906343

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    1. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, Elsevier, vol. 1(1), pages 83-106, June.
    2. Crato, Nuno & de Lima, Pedro J. F., 1994. "Long-range dependence in the conditional variance of stock returns," Economics Letters, Elsevier, Elsevier, vol. 45(3), pages 281-285.
    3. De Jong, Frank & Mahieu, Ronald & Schotman, Peter, 1998. "Price discovery in the foreign exchange market: an empirical analysis of the yen/dmark rate1, 2," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(1), pages 5-27, February.
    4. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 73(1), pages 5-59, July.
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