The tick/volatility ratio as a determinant of the compass rose pattern

Chun Lee, Ike Mathur and Kimberly Gleason

The European Journal of Finance, 2005, vol. 11, issue 2, 93-109

Abstract: This study provides evidence that low frequency data masks certain returns phenomena in the foreign exchange (forex) market. It is shown that the compass rose pattern is entirely absent in daily returns in the spot and futures forex markets. In contrast, the intraday returns, especially those for holding periods of less than an hour, clearly exhibit the pattern. Monte Carlo investigation of the tick/volatility ratio provides convincing evidence that the pattern appears only if the tick/volatility ratio is above some threshold level. Since intraday returns have a ratio above the threshold value, they exhibit the pattern. On the other hand, the absence of the pattern in daily returns is due to the fact that the spot and futures currency returns examined have a ratio much smaller than the threshold value. Overall, the evidence is consistent with the hypothesis that the tick/volatility ratio is a determinant of the compass rose pattern. The economic implications of this pattern are discussed.

Date: 2005
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DOI: 10.1080/1351847032000137438

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