The prediction of periods of high volatility in exchange markets

C. Windsor and A. Thyagaraja
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C. Windsor: UKAEA Fusion, D3, Culham Science Centre, OX14 3DB, UK
A. Thyagaraja: UKAEA Fusion, D3, Culham Science Centre, OX14 3DB, UK

The European Physical Journal B: Condensed Matter and Complex Systems, 2001, vol. 20, issue 4, 581-584

Abstract: Abstract: A statistical connection is identified between the current spread in a market over a given time period and the drift of the market during previous time periods. It is shown that periods of high spread are likely to be preceded by periods with relatively large market drifts. Several markets, including the UK pound per US Dollar, US Dollar per Yen, UK pound per Euro, and the UK FT100 index have been analysed from 1991 to 2000 over variable periods of weeks, months and quarters. Within each period, i the natural logarithm of the daily end-of-trade market value has been least squares fitted to a linear regression line, and evaluations made of the regression line slope μ i, the direct spread si with respect to the mean value, and the regression spread ri of the deviations from the regression line. Significant correlations have been observed between the current monthly direct spread si for each period i and the absolute value of the drifts |μ i-j| evaluated j periods earlier. This correlation coefficient is as high as 0.746 for a period of one quarter (j = 1) and appears to die away after around 9 months for quarterly averages, after around 4 months for monthly averages and after around 2 months for weekly averages.

Keywords: PACS. 89.65.Gh Economics; business; and financial markets (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1007/PL00011111

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