Indeterminacy in foreign exchange market

Michele Pasquini and Maurizio Serva
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Michele Pasquini: I.N.F.M. and Dip. di Matematica, Universit\`a dell'Aquila, Italy
Maurizio Serva: I.N.F.M. and Dip. di Matematica, Universit\`a dell'Aquila, Italy

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Abstract: We discuss price variations distributions in foreign exchange markets, characterizing them both in calendar and business time frameworks. The price dynamics is found to be the result of two distinct processes, a multi-variance diffusion and an error process. The presence of the latter, which dominates at short time scales, leads to indeterminacy principle in finance. Furthermore, dynamics does not allow for a scheme based on independent probability distributions, since volatility exhibits a strong correlation even at the shortest time scales.

Date: 1999-06
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