The scale of market quakes

TL;DR

This paper introduces the Scale of Market Quakes (SMQ), a new metric to quantify daily market activity by analyzing excess price moves between directional changes, applied to FX markets and news events.

Contribution

The paper proposes a novel methodology for measuring market activity through SMQ, focusing on excess price moves and their dynamics, with empirical validation on FX data from 2003 to 2009.

Findings

SMQ effectively captures market activity fluctuations.

SMQ responds to major news announcements.

Analysis shows SMQ evolution over years across currencies.

Abstract

We define a methodology to quantify market activity on a 24 hour basis by defining a scale, the so-called scale of market quakes (SMQ). The SMQ is designed within a framework where we analyse the dynamics of excess price moves from one directional change of price to the next. We use the SMQ to quantify the FX market and evaluate the performance of the proposed methodology at major news announcements. The evolution of SMQ magnitudes from 2003 to 2009 is analysed across major currency pairs.