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Comprehensive Analysis of Market Conditions in the Foreign Exchange Market: Fluctuation Scaling and Variance-Covariance Matrix

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  • Aki-Hiro Sato
  • Takaki Hayashi
  • Janusz A. Ho{l}yst

Abstract

We investigate quotation and transaction activities in the foreign exchange market for every week during the period of June 2007 to December 2010. A scaling relationship between the mean values of number of quotations (or number of transactions) for various currency pairs and the corresponding standard deviations holds for a majority of the weeks. However, the scaling breaks in some time intervals, which is related to the emergence of market shocks. There is a monotonous relationship between values of scaling indices and global averages of currency pair cross-correlations when both quantities are observed for various window lengths $\Delta t$.

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  • Aki-Hiro Sato & Takaki Hayashi & Janusz A. Ho{l}yst, 2012. "Comprehensive Analysis of Market Conditions in the Foreign Exchange Market: Fluctuation Scaling and Variance-Covariance Matrix," Papers 1204.0426, arXiv.org.
  • Handle: RePEc:arx:papers:1204.0426
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    References listed on IDEAS

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    1. Sazuka, Naoya & Inoue, Jun-ichi & Scalas, Enrico, 2009. "The distribution of first-passage times and durations in FOREX and future markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(14), pages 2839-2853.
    2. Liu, Li-Zhi & Qian, Xi-Yuan & Lu, Heng-Yao, 2010. "Cross-sample entropy of foreign exchange time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4785-4792.
    3. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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    5. Kevin Fergusson & Eckhard Platen, 2006. "On the Distributional Characterization of Daily Log-Returns of a World Stock Index," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 19-38.
    6. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
    7. Kaltwasser, Pablo Rovira, 2010. "Uncertainty about fundamentals and herding behavior in the FOREX market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(6), pages 1215-1222.
    8. Alfarano, Simone & Lux, Thomas & Wagner, Friedrich, 2006. "Estimation of a simple agent-based model of financial markets: An application to Australian stock and foreign exchange data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 38-42.
    9. Sato, Aki-Hiro & Nishimura, Maiko & Hołyst, Janusz A., 2010. "Fluctuation scaling of quotation activities in the foreign exchange market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(14), pages 2793-2804.
    10. Thierry Ané & Hélyette Geman, 2000. "Order Flow, Transaction Clock, and Normality of Asset Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2259-2284, October.
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