Indeterminacy in foreign exchange market

TL;DR

This paper analyzes foreign exchange market price variations, revealing a dual-process dynamic involving diffusion and error processes, leading to indeterminacy and correlated volatility at short time scales.

Contribution

It introduces a dual-process model for FX prices and demonstrates the indeterminacy principle arising from error processes dominating at short time scales.

Findings

Price variations are driven by diffusion and error processes.

Error process dominance causes indeterminacy in FX prices.

Volatility shows strong correlation even at short time scales.

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.