STATISTICALLY VALIDATED LEAD-LAG NETWORKS AND INVENTORY PREDICTION IN THE FOREIGN EXCHANGE MARKET

DOI10.1142/S0219525918500194arXiv1609.04640OpenAlexW2884504691WikidataQ129244015 ScholiaQ129244015MaRDI QIDQ6203296FDOQ6203296

Authors: Damien Challet, Rémy Chicheportiche, Mehdi Lallouache, Serge Kassibrakis 

Publication date: 27 March 2024

Published in: Advances in Complex Systems (Search for Journal in Brave)

Abstract: We introduce a method to infer lead-lag networks of agents' actions in complex systems. These networks open the way to both microscopic and macroscopic states prediction in such systems. We apply this method to trader-resolved data in the foreign exchange market. We show that these networks are remarkably persistent, which explains why and how order flow prediction is possible from trader-resolved data. In addition, if traders' actions depend on past prices, the evolution of the average price paid by traders may also be predictable. Using random forests, we verify that the predictability of both the sign of order flow and the direction of average transaction price is strong for retail investors at an hourly time scale, which is of great relevance to brokers and order matching engines. Finally, we argue that the existence of trader lead-lag networks explains in a self-referential way why a given trader becomes active, which is in line with the fact that most trading activity has an endogenous origin.

Full work available at URL: https://arxiv.org/abs/1609.04640

zbMATH Keywords

predictionforeign exchangeinventory managementlead-lag networkstrader-resolved data

Mathematics Subject Classification ID

Game theory, economics, finance, and other social and behavioral sciences (91-XX)

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Cited In (3)

• Analysis of exchange rates as time-inhomogeneous Markov chain with finite states
• Unveiling the relation between herding and liquidity with trader lead-lag networks
• The market nanostructure origin of asset price time reversal asymmetry

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