Abstract
This paper is about money, and why today’s foreign exchange (FX) markets are unstable. According to the literature [1], FX markets were fundamentally different before and after WW I. Any attempt to discuss this topic within standard economic theory necessarily fails because money/liquidity/uncertainty is completely excluded from that theory [2]. Fortunately, our market dynamics models adequately serve our purpose. Eichengreen [1] has presented a stimulating history of the evolution of FX markets from the gold standard of the late nineteenth century through the Bretton Woods Agreement (post WWII–1971) and later the floating currencies of our present market deregulation era (1971–present). He asserts a change from stability to instability over the time interval of WWI. Making his argument precise, we describe how speculators could have made money systematically from a market in statistical equilibrium. The present era normal liquid FX markets are in contrast very hard, to a first approximation impossible, to beat, and consequently are described as ‘martingales’. The ideas of martingales and options/hedging were irrelevant in the pre-WWI era. I end my historical discussion with the empirical evidence for the stochastic model that describes FX market dynamics quantitatively accurately during the last 7–17 years [3].
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
B. Eichengreen, Globalizing Capital: A History of the International Monetary System, Princeton University Press, Princeton, NJ, 1998.
J.L. McCauley, Dynamics of Markets: Econophysics and Finance, Cambridge University Press, Cambridge, 2004.
K.E. Bassler, J.L. McCauley, & G.H. Gunaratne, Nonstationary Increments, Scaling Distributions, and Variable Diffusion Processes in Financial Markets, PNAS 104, 172287, 2007.
J.L. McCauley, G.H. Gunaratne, & K.E. Bassler, in Dynamics of Complex Interconnected Systems, Networks and Bioprocesses, eds. A.T. Skjeltorp & A. Belyushkin, Springer, New York, 2005.
R.L. Stratonovich, Topics in the Theory of Random Noise, tr. R.A. Silverman, Gordon & Breach, New York, 1963.
A.M. Yaglom & I.M. Yaglom, An Introduction to the Theory of Stationary Random Functions, tr. and eds. R.A. Silverman, Prentice-Hall, Englewood Cliffs, NJ, 1962.
R. Durrett, Brownian Motion and Martingales in Analysis, Wadsworth, Belmont, 1984.
J.L. McCauley, K.E. Bassler, & G.H. Gunaratne, Martingales, Detrending Data, and the Efficient Market Hypothesis, Physica A387, 202, 2008.
L. Arnold, Stochastic Differential Equations, Krieger, Malabar, 1992.
Christoph Hauert, in this book.
M.F.M. Osborne, The Random Character of Stock Market Prices, ed. P Cootner, MIT Press, Cambridge, MA, 1964.
C. Moore, Nonlinearity 4, 199, 727, 1991.
C.P. Kindleberger, Manias, Panics, and Crashes, A History of Financial Crises, Wiley, New York, 1996.
F. Black & M. Scholes, J. Pol. Econ. 8, 637, 1973.
P. Scholl-Latour, Das Schlachtfeld der Zukunft. Zwischen Kaukasus und Pamir, Goldman, München, 1998.
N. Dunbar, Inventing Money, Long-Term Capital Management and the Search for Risk-Free Profits, Wiley, New York, 2000.
P. Mirowski, Machine Dreams, Cambridge University Press, Cambridge, 2002.
F. Modigilani & M. Miller, The American Econ. Rev. XLVIII, 3, 261, 1958.
B. Mandelbrot, The Random Character of Stock Market Prices, ed. P. Cootner, MIT Press, Cambridge, MA, 1964.
K.E. Bassler, G.H. Gunaratne, & J.L. McCauley, Physica A 369, 343, 2006.
B. Mandelbrot & J.W. van Ness, SIAM Rev. 10, 2, 422, 1968.
B. Mandelbrot, J. Business 39, 242, 1966.
J.L. McCauley, G.H. Gunaratne, & K.E. Bassler, Hurst Exponents, Markov Processes, and Fractional Brownian Motion, Physica A 2007.
J.L. McCauley, G.H. Gunaratne, & K.E. Bassler, Martingale option pricing, Physica A 380, 351–356, 2007.
M.F.M. Osborne, The Stock Market and Finance from a Physicist’s Viewpoint, Crossgar, Minneapolis, MN, 1977.
F. Black, J. Finance 3, 529, 1986.
E. Derman, My Life as a Quant, Wiley, New York, 2004.
P.L. Bernstein, Capital Ideas: The Improbable Origins of Modern Wall Street, The Free Press, New York, 1992.
M. Lewis, Liar’s Poker, Penguin, New York, 1989.
S. Gallucio, G. Caldarelli, M. Marsili, & Y.-C. Zhang, Physica A 245, 423, 1997.
K.E. Bassler, to be submitted, 2007.
P. Embrechts & M. Maejima, Self-Similar Processes, Princeton University Press, Princeton, NJ, 2002.
A.L. Alejandro-Quinones, K.E. Bassler, M. Field, J.L. McCauley, M. Nicol, I. Timofeyev, A. Török, & G.H. Gunaratne, Physica A 363A, 383, 2006.
J.L. McCauley, Markov vs. nonMarkovian processes: A comment on the paper ‘Stochastic feedback, nonlinear families of Markov processes, and nonlinear Fokker-Planck equations’ by T.D. Frank, Physica A 382, 445–452, 2007.
P. Hänggi, H. Thomas, H. Grabert, & P. Talkner, J. Stat. Phys. 18, 155, 1978.
L. Borland, Phy. Rev. Lett. 89, 9, 2002.
C. Renner, J. Peinke, & R. Friedric, Physica A 298, 2001.
M.M. Dacoroga, G. Ramazan, U.A. Müller, R.B. Olsen, & O.V. Picte, An Introduction to High Frequency Finance, Academic, New York, 2001.
T. Di Matteo, T. Aste, & M.M. Dacorogna, Physica A 324, 183, 2003.
J.L. McCauley, K.E. Bassler, & G.H. Gunaratne, On the Analysis of Time Series with Nonstationary Increments in Handbook of Complexity Research, ed. B. Rosser, 2007.
K.E. Bassler, G.H. Gunaratne, & J.L. McCauley, Int. Rev. Fin. An., 2008 (to appear)
P. Hänggi & H. Thomas, Zeitschr. Für Physik B26, 85, 1977.
A. W. Lo, H. Mamaysky, & J. Wang, J. Finance LV, Nr. 4, 1705, 2000.
E. Fama, J. Finance 25, 383–417, 1970.
Johannes A. Skjeltorp, Scaling in the Norwegian stock market, Physica A 283, 486–528, 2000.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2008 Springer Science + Business Media B.V
About this paper
Cite this paper
McCauley, J.L. (2008). Evolution of FX Markets via Globalization of Capital. In: Skjeltorp, A.T., Belushkin, A.V. (eds) Evolution from Cellular to Social Scales. NATO Science for Peace and Security Series B: Physics and Biophysics. Springer, Dordrecht. https://doi.org/10.1007/978-1-4020-8761-5_9
Download citation
DOI: https://doi.org/10.1007/978-1-4020-8761-5_9
Publisher Name: Springer, Dordrecht
Print ISBN: 978-1-4020-8760-8
Online ISBN: 978-1-4020-8761-5
eBook Packages: Physics and AstronomyPhysics and Astronomy (R0)