A STOCHASTIC CASCADE MODEL FOR FX DYNAMICS

DOI10.1142/S021902490000019XMaRDI QIDQ4521253zbMATH OpenOpenAlexWikidataFDO

Authors Wolfgang Breymann, Shoaleh Ghashghaie, Peter Talkner

Publication date 19 December 2000

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cond-mat/0004179

zbMATH Keywords

heterogeneous markethydrodynamic turbulenceinformation flowKolmogorov cascadevolatility

Mathematics Subject Classification ID

Turbulence (76F99) Economic time series analysis (91B84)

Abstract: A time series model for the FX dynamics is presented which takes into account structural peculiarities of the market, namely its heterogeneity and an information flow from long to short time horizons. The model emerges from an analogy between FX dynamics and hydrodynamic turbulence. The heterogeneity of the market is modeled in form of a multiplicative cascade of time scales ranging from several minutes to a few months, analogous to the Kolmogorov cascade in turbulence. The model reproduces well the important empirical characteristics of FX rates for major currencies, as the heavy-tailed distribution of returns, their change in shape with increasing time interval, and the persistence of volatility.

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Cited in

(10)

• Scaling, correlations, and cascades in finance and turbulence
• Dynamical model of financial markets: fluctuating `temperature' causes intermittent behavior of price changes
• Coherent foreign exchange market models
• EMPIRICAL TESTING OF MULTIFRACTALITY OF FINANCIAL TIME SERIES BASED ON WTMM
• Turbulent Behavior of Stock Exchange Indices and Foreign Currency Exchange Rates
• Turbulence in financial markets: the surprising explanatory power of simple cascade models
• Multi-scale description and prediction of financial time series
• Turbulence on financial markets and multiplicative cascade model of volatility
• Evidence of Markov properties of high frequency exchange rate data
• Modeling the BUX index by a novel stochastic differential equation

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