Working Paper: NBER ID: w14160
Authors: Yuko Hashimoto; Takatoshi Ito; Takaaki Ohnishi; Misako Takayasu; Hideki Takayasu; Tsutomu Watanabe
Abstract: Using tick-by-tick data of the dollar-yen and euro-dollar exchange rates recorded in the actual transaction platform, a "run" -- continuous increases or decreases in deal prices for the past several ticks -- does have some predictable information on the direction of the next price movement. Deal price movements, that are consistent with order flows, tend to continue a run once it started i.e., conditional probability of deal prices tend to move in the same direction as the last several times in a row is higher than 0.5. However, quote prices do not show such tendency of a run. Hence, a random walk hypothesis is refuted in a simple test of a run using the tick by tick data. In addition, a longer continuous increase of the price tends to be followed by larger reversal. The findings suggest that those market participants who have access to real-time, tick-by-tick transaction data may have an advantage in predicting the exchange rate movement. Findings here also lend support to the momentum trading strategy.
Keywords: Foreign Exchange Market; Conditional Probability; Tick-by-Tick Data; Momentum Trading; Random Walk Hypothesis
JEL Codes: F31; F33; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conditional probability of deal prices continuing to rise or fall after a run (G17) | momentum effect in deal prices (G34) |
| longer continuous price increases (E30) | larger reversals (E65) |
| deal prices (P22) | more likely to follow a trend than quote prices (E30) |
| quote prices (Y60) | mean-reverting behavior (C22) |