Munich Personal RePEc Archive

Origins of scaling in FX markets

Mercik, Szymon and Weron, Rafal (2002): Origins of scaling in FX markets.

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Typical data sets employed by economists and financial analysts do not exceed a few hundred or thousand observations per series. However, in the last decade data sets containing tick-by-tick observations have become available. The studies of these data have turned up new and interesting facts about the pricing of assets.

In this article we show that foreign exchange (FX) rate returns satisfy scaling with an exponent significantly different from that of a random walk. But what is more important, we also show that the conditionally exponential decay (CED) model can be used to solve a long standing problem in the analysis of intra-daily data, i.e. it can be used to identify the mathematical structure of the distributions of FX returns corresponding to the empirical scaling laws.

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