Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Researchers gain new insight into the foreign exchange market

17.03.2011
University of Miami physicists develop mathematical model for price changes of currencies and unveil patterns of synchronicity in the FX market

Physicist Guannan Zhao, Ph.D. student at the University of Miami, and his collaborators have developed a mathematical model to describe the timing of price changes of currencies and the overall dynamics of the Foreign Exchange (FX) market.

Zhao presented his findings in a keynote address on Saturday, March 12, at the second International Conference on Financial Theory and Engineering (ICFTE 2011), in Shanghai, China.

The FX market is the largest financial market in the world. It is made up of buyers and sellers from all over the globe. Their combined actions determine the value of currencies at any given time. Understanding how the market behaves can be useful to researchers studying theoretical pricing, help investors develop new trading strategies and act as a guide to avoid future crises.

The major participants in FX market are mostly big international, commercial banks, which have a retail currency exchange service and active FX trading business. Consequently, the researchers examined data gathered by HSBC Bank, in London, collected throughout individual days, on the timescale of seconds. This high frequency data allowed the scientists to study the market with great accuracy. The key finding is a multi-agent mathematical model that describes the timing of the price changes in the FX market.

"We studied data from the FX market and found an interesting fact: That the waiting time between price changes of different currencies follows a mathematical power law, and this power law is universal for all different kinds of currency pairs," says Zhao, a Ph.D. student in Physics, at the College of Arts and Sciences and a member of the of the Complexity research group, at UM. "We built up a model to explain the statistical pattern in the waiting time distribution. This model helps us understand the high frequency extremes in markets because it captures the general mechanics of FX trading and mimics its collective behavior."

Since currencies are traded against one another, the researchers looked at eight currency pairs. With data accurate to the second, they were able to describe the behavior of the price changes for each pair, any time of the day. For example, between 7:00 and 17:00, on May 13, 2010 London time, the least active pair was the EURNOK (the price of Euros with Norwegian krones), with 861 ask price changes in 10 hours, and the most active pair was the GBPUSD (the price of British pound sterling with U.S. dollars) with 14,862 ask price changes.

Another interesting finding is the appearance of synchronicity in the behavior of pairs of currency rates. Like dancers in an elaborate choreography, living things seem to act in harmony. A school of fish gracefully moving through the water, people applauding at a concert, and fireflies flashing at night; all are examples of collective complex behavior, with crowds of individuals acting in sync.

"Synchronicity is a by-product of complexity and the key signature of what stops Life from being completely disorganized. It is what makes cells act together to form what we call an organ, such as a heart or a brain. It is what makes societies work for the common good instead of pure individualism. In other words, it is what makes life 'work' on all levels," says Neil Johnson, professor of physics and director of UM's Complexity research group, who is Zhao's Ph.D. supervisor and collaborated with him in this research project. "Synchronicity is never perfect, but it is better than pure random disorder."

The researchers looked at the overall dynamics of the FX market and found that synchronicity occurs in the form of currency pairs changing their rates within the same time frame. In the study, synchronicity was detected as a "collective rush to trade in a particular way at the same time." The researchers also observed that synchronicity increases with increased activity. The phenomenon can be seen as a double peak shape in the morning and early afternoon, with the low activity level at around 11:00 a.m., London time.

The researchers are working to further improve their model of price changes of currencies and hence create a full mathematical description of the synchronicity which they observe across the global FX market.

The University of Miami's mission is to educate and nurture students, to create knowledge, and to provide service to our community and beyond. Committed to excellence and proud of the diversity of our University family, we strive to develop future leaders of our nation and the world. www.miami.edu

Catharine Skipp | EurekAlert!
Further information:
http://www.miami.edu

More articles from Business and Finance:

nachricht Corporate coworking as a driver of innovation
22.11.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Long-lived storage of a photonic qubit for worldwide teleportation

MPQ scientists achieve long storage times for photonic quantum bits which break the lower bound for direct teleportation in a global quantum network.

Concerning the development of quantum memories for the realization of global quantum networks, scientists of the Quantum Dynamics Division led by Professor...

Im Focus: Electromagnetic water cloak eliminates drag and wake

Detailed calculations show water cloaks are feasible with today's technology

Researchers have developed a water cloaking concept based on electromagnetic forces that could eliminate an object's wake, greatly reducing its drag while...

Im Focus: Scientists channel graphene to understand filtration and ion transport into cells

Tiny pores at a cell's entryway act as miniature bouncers, letting in some electrically charged atoms--ions--but blocking others. Operating as exquisitely sensitive filters, these "ion channels" play a critical role in biological functions such as muscle contraction and the firing of brain cells.

To rapidly transport the right ions through the cell membrane, the tiny channels rely on a complex interplay between the ions and surrounding molecules,...

Im Focus: Towards data storage at the single molecule level

The miniaturization of the current technology of storage media is hindered by fundamental limits of quantum mechanics. A new approach consists in using so-called spin-crossover molecules as the smallest possible storage unit. Similar to normal hard drives, these special molecules can save information via their magnetic state. A research team from Kiel University has now managed to successfully place a new class of spin-crossover molecules onto a surface and to improve the molecule’s storage capacity. The storage density of conventional hard drives could therefore theoretically be increased by more than one hundred fold. The study has been published in the scientific journal Nano Letters.

Over the past few years, the building blocks of storage media have gotten ever smaller. But further miniaturization of the current technology is hindered by...

Im Focus: Successful Mechanical Testing of Nanowires

With innovative experiments, researchers at the Helmholtz-Zentrums Geesthacht and the Technical University Hamburg unravel why tiny metallic structures are extremely strong

Light-weight and simultaneously strong – porous metallic nanomaterials promise interesting applications as, for instance, for future aeroplanes with enhanced...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

See, understand and experience the work of the future

11.12.2017 | Event News

Innovative strategies to tackle parasitic worms

08.12.2017 | Event News

AKL’18: The opportunities and challenges of digitalization in the laser industry

07.12.2017 | Event News

 
Latest News

A whole-body approach to understanding chemosensory cells

13.12.2017 | Health and Medicine

Water without windows: Capturing water vapor inside an electron microscope

13.12.2017 | Physics and Astronomy

Cellular Self-Digestion Process Triggers Autoimmune Disease

13.12.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>