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Random Walk or A Run: Market Microstructure Analysis of the Foreign Exchange Rate Movements based on Conditional Probability

Author Info

Listed author(s):
  • Yuko Hashimoto
  • Takatoshi Ito
  • Takaaki Ohnishi
  • Misako Takayasu
  • Hideki Takayasu
  • Tsutomu Watanabe

Abstract

Using tick-by-tick data of the dollar-yen and euro-dollar exchange rates recorded in the actual transaction platform, a "run" -- continuous increases or decreases in deal prices for the past several ticks -- does have some predictable information on the direction of the next price movement. Deal price movements, that are consistent with order flows, tend to continue a run once it started i.e., conditional probability of deal prices tend to move in the same direction as the last several times in a row is higher than 0.5. However, quote prices do not show such tendency of a run. Hence, a random walk hypothesis is refuted in a simple test of a run using the tick by tick data. In addition, a longer continuous increase of the price tends to be followed by larger reversal. The findings suggest that those market participants who have access to real-time, tick-by-tick transaction data may have an advantage in predicting the exchange rate movement. Findings here also lend support to the momentum trading strategy.

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File URL: http://www.nber.org/papers/w14160.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14160.

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Date of creation: Jul 2008
Publication status: published as Yuko Hashimoto & Takatoshi Ito & Takaaki Ohnishi & Misako Takayasu & Hideki Takayasu & Tsutomu Watanabe, 2012. "Random walk or a run. Market microstructure analysis of foreign exchange rate movements based on conditional probability," Quantitative Finance, vol 12(6), pages 893-905.
Handle: RePEc:nbr:nberwo:14160
Note: IFM ME
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Keywords:

Find related papers by JEL classification:

  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. In praise of belief in efficient markets
    by chris dillow in Stumbling and Mumbling on 2009-02-13 11:14:47
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Cited by:

  1. Evans, Kevin & Speight, Alan, 2010. "International macroeconomic announcements and intraday euro exchange rate volatility," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 552-568, December.
  2. Zapart, Christopher A., 2015. "Econophysics: A challenge to econometricians," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 419(C), pages 318-327.
  3. Rechenthin, Michael & Street, W. Nick, 2013. "Using conditional probability to identify trends in intra-day high-frequency equity pricing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(24), pages 6169-6188.
  4. Schmidt, Anatoly B., 2009. "Detrending the realized volatility in the global FX market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(9), pages 1887-1892.

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