Comprehensive Analysis of Market Conditions in the Foreign Exchange Market: Fluctuation Scaling and Variance-Covariance Matrix

TL;DR

This paper analyzes foreign exchange market data from 2007 to 2010, revealing a scaling relationship between activity levels and variability, which breaks during market shocks, and explores the relationship between scaling indices and cross-correlations.

Contribution

It provides a comprehensive analysis of market activity scaling laws and their relation to cross-correlations, highlighting how market shocks affect these relationships.

Findings

Scaling relationship holds in most weeks but breaks during shocks.

Monotonous relationship between scaling indices and cross-correlations.

Market shocks disrupt typical scaling patterns.

Abstract

We investigate quotation and transaction activities in the foreign exchange market for every week during the period of June 2007 to December 2010. A scaling relationship between the mean values of number of quotations (or number of transactions) for various currency pairs and the corresponding standard deviations holds for a majority of the weeks. However, the scaling breaks in some time intervals, which is related to the emergence of market shocks. There is a monotonous relationship between values of scaling indices and global averages of currency pair cross-correlations when both quantities are observed for various window lengths $\Delta t$.