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Hybrid dynamics for currency modeling

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  • Ted Theodosopoulos
  • Alex Trifunovic
Abstract
We present a simple hybrid dynamical model as a tool to investigate behavioral strategies based on trend following. The multiplicative symbolic dynamics are generated using a lognormal diffusion model for the at-the-money implied volatility term structure. Thus, are model exploits information from derivative markets to obtain qualititative properties of the return distribution for the underlier. We apply our model to the JPY-USD exchange rate and the corresponding 1mo., 3mo., 6mo. and 1yr. implied volatilities. Our results indicate that the modulation of autoregressive trend following using derivative-based signals significantly improves the fit to the distribution of times between successive sign flips in the underlier time series.

Suggested Citation

  • Ted Theodosopoulos & Alex Trifunovic, 2006. "Hybrid dynamics for currency modeling," Papers math/0605457, arXiv.org.
    • Handle: RePEc:arx:papers:math/0605457
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    References listed on IDEAS

    as
    1. Marc Potters & Jean-Philippe Bouchaud, 2005. "Trend followers lose more often than they gain," Papers physics/0508104, arXiv.org.
    2. Ohnishi, Takaaki & Mizuno, Takayuki & Aihara, Kazuyuki & Takayasu, Misako & Takayasu, Hideki, 2004. "Statistical properties of the moving average price in dollar–yen exchange rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 207-210.
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    7. Takayuki Mizuno & Misako Takayasu & Hideki Takayasu, 2006. "Modeling a foreign exchange rate using moving average of Yen-Dollar market data," Springer Books, in: Hideki Takayasu (ed.), Practical Fruits of Econophysics, pages 57-61, Springer.
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