Random walk or a run. Market microstructure analysis of foreign exchange rate movements based on conditional probability |
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| Authors: | Yuko Hashimoto Takaaki Ohnishi Misako Takayasu Hideki Takayasu Tsutomu Watanabe |
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| Institution: | 1. Statistics Department , International Monetary Fund , 700 19th Street, N.W. Washington , DC 20431 , USA;2. The Canon Institute for Global Studies , 11F, Shin-Marunouchi Bldg., 1-5-1 Marunouchi, Chiyoda-Ku, Tokyo 100-6511, Japan and Graduate School of Economics, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku , Tokyo 113-0033 , Japan;3. Department of Computational Intelligence and Systems Science , Interdisciplinary Graduate School of Science and Engineering, Tokyo Institute of Technology , 4259-G3-52 Nagatsuta-cho, Midori-ku , Yokohama 226-8502 , Japan;4. Sony Computer Science Laboratories , 3-14-13 Higashigotanda, Shinagawa-ku , Tokyo 141-0022 , Japan;5. Institute of Economic Research, Hitotsubashi University , 2-1 Naka, Kunitachi-city , Tokyo 186-8603 , Japan |
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| Abstract: | Using tick-by-tick data for the dollar–yen and euro–dollar exchange rates recorded on 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 is started. Indeed, conditional probabilities of a run continuing in the same direction after several consecutive observations exceed 0.5. However, quote prices do not show such a run tendency. Hence, a random walk hypothesis is refuted in a simple test of a run using tick-by-tick data. In addition, a longer continuous increase of the price tends to be followed by a 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 exchange rate movements. The findings reported here also lend support to the momentum trading strategy. |
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| Keywords: | Exchange rates International finance International economics Financial time series |
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