A Langevin equation for the rates of currency exchange based on the Markov analysis

F. Farahpour, Z. Eskandari, A. Bahraminasab, G.R. Jafari, F. Ghasemi, Muhammad Sahimi and M. Reza Rahimi Tabar

Physica A: Statistical Mechanics and its Applications, 2007, vol. 385, issue 2, 601-608

Abstract: We propose a method for analyzing the data for the rates of exchange of various currencies versus the U.S. dollar. The method analyzes the return time series of the data as a Markov process, and develops an effective equation which reconstructs it. We find that the Markov time scale, i.e., the time scale over which the data are Markov-correlated, is one day for the majority of the daily exchange rates that we analyze. We derive an effective Langevin equation to describe the fluctuations in the rates. The equation contains two quantities, D(1) and D(2), representing the drift and diffusion coefficients, respectively. We demonstrate how the two coefficients are estimated directly from the data, without using any assumptions or models for the underlying stochastic time series that represent the daily rates of exchange of various currencies versus the U.S. dollar.

Keywords: Markov process; Rates of exchange of various currencies; Fluctuations; Drift and diffusion coefficients (search for similar items in EconPapers)
Date: 2007
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:385:y:2007:i:2:p:601-608

DOI: 10.1016/j.physa.2007.06.048

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