Title: Turbulent cascades in foreign exchange markets
Authors : Ghashghaie, Shoaleh
Breymann, Wolfgang
Peinke, Joachim
Talkner, Peter
Dodge, Yadolah
Published in : Nature : international Weekly Journal of Science
Issue : 381
Pages : 767
Pages to: 770
Publisher / Ed. Institution : Nature Publishing Group
Issue Date: 1996
License (according to publishing contract) : Licence according to publishing contract
Type of review: Peer review (Publication)
Language : English
Subject (DDC) : 332: Financial economics
Abstract: The availability of high-frequency data for financial markets has made it possible to study market dynamics on timescales of less than a day1. For foreign exchange (FX) rates Müller et al.2 have shown that there is a net flow of information from long to short timescales: the behaviour of long-term traders (who watch the markets only from time to time) influences the behaviour of short-term traders (who watch the markets continuously). Motivated by this hierarchical feature, we have studied FX market dynamics in more detail, and report here an analogy between these dynamics and hydrodynamic turbulence3–8. Specifically, the relationship between the probability density of FX price changes (δx) and the time delay (δt) (Fig. la) is much the same as the relationship between the probability density of the velocity differences (δv) of two points in a turbulent flow and their spatial separation δr (Fig. 1b). Guided by this similarity we claim that there is an information cascade in FX market dynamics that corresponds to the energy cascade in hydrodynamic turbulence. On the basis of this analogy we can now rationalize the statistics of FX price differences at different time delays, which is important for, for example, option pricing. The analogy also provides a conceptual framework for understanding the short-term dynamics of speculative markets.
Departement: School of Engineering
Organisational Unit: Institute of Data Analysis and Process Design (IDP)
Publication type: Article in scientific Journal
DOI : 10.1038/381767a0
ISSN: 0028-0836
URI: https://digitalcollection.zhaw.ch/handle/11475/4613
Appears in Collections:Publikationen School of Engineering

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