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Indeterminacy in foreign exchange market


  • 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)


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.

Suggested Citation

  • Michele Pasquini & Maurizio Serva, 1999. "Indeterminacy in foreign exchange market," Papers cond-mat/9906343,
  • Handle: RePEc:arx:papers:cond-mat/9906343

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    References listed on IDEAS

    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, vol. 1(1), pages 83-106, June.
    2. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
    3. Crato, Nuno & de Lima, Pedro J. F., 1994. "Long-range dependence in the conditional variance of stock returns," Economics Letters, Elsevier, vol. 45(3), pages 281-285.
    4. 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, vol. 17(1), pages 5-27, February.
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