A STOCHASTIC CASCADE MODEL FOR FX DYNAMICS

Wolfgang Breymann, Shoaleh Ghashghaie and Peter Talkner
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Wolfgang Breymann: Olsen & Associates, Seefeldstrasse 233, 8008 Zurich, Switzerland
Shoaleh Ghashghaie: Institut für mathematische Statistik, Sidlerstr. 5, 3012 Bern, Switzerland
Peter Talkner: Paul Scherrer Institut, 5232 Villigen, Switzerland

International Journal of Theoretical and Applied Finance (IJTAF), 2000, vol. 03, issue 03, 357-360

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 the 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 the increasing time interval, and the persistence of volatility.

Keywords: Hydrodynamic turbulence; Kolmogorov cascade; heterogeneous market; information flow; volatility (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1142/S021902490000019X

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