Turbulence hierarchy in foreign exchange markets

Area of Science:

• Quantitative Finance
• Market Microstructure
• Stochastic Analysis

Background:

• Foreign exchange markets exhibit complex dynamics not fully captured by traditional models.
• Information cascades play a crucial role in currency market behavior.
• Existing models often lack a multiscale perspective on market intermittency.

Purpose of the Study:

• To apply H-theory formalism for a multiscale stochastic analysis of foreign exchange rates.
• To model the hierarchical intermittency of information cascades in currency markets.
• To investigate the relationship between market size and the complexity of information cascades.

Main Methods:

• Utilized H-theory formalism for multiscale stochastic analysis.
• Examined return and volatility distributions for EUR/USD, USD/JPY, and GBP/USD.
• Developed a theoretical framework drawing analogies with turbulence energy cascades.

Main Results:

• Identified a hierarchy of timescales in the analyzed currency markets.
• Demonstrated that larger markets possess more levels in their hierarchy.
• Established a correlation between market size and the number of information cascade levels.

Conclusions:

• The H-theory formalism provides a robust framework for understanding hierarchical intermittency in financial markets.
• Market size is a key factor influencing the complexity of information cascades.
• Turbulence-like models offer potential for developing advanced algorithmic trading strategies.