Analyzing Market Microstructure with Methods of Statistical Physics
Econophysics is a new interdisciplinary field, where methods and concepts of
statistical physics are used to study economics and financial phenomena. In
our research, market microstructure is a key concept that has gained a lot of
attention due to the development of high-frequency trading. The main focus
of the thesis is the application of methods from statistical physics on diverse
complex systems. Particularly, we are interested in price response functions
applied to correlated financial markets and foreign exchange markets.
The study of price response functions is relevant to better understand the
impact of trading on price changes. We extend previous works to evaluate
the methods and show the impact of slight changes on the results.
We start analyzing price response functions and spread impact in correlated
financial markets. Knowing that the price response measurement depends on the
data set and the research focus, we center on how the details of the price
response definition modify the results. We evaluate different price response
implementations. Furthermore, we show the key importance of the order between
trade signs and returns. Moreover, we confirm the dominating contribution of
immediate price response directly after a trade and finally, we test the impact
of the spread in the price response.
We then extend the price response functions analysis in the spot foreign
exchange market for different years and different time scales. Furthermore, we
use a price increment point (pip) bid-ask spread definition to group different
foreign exchange pairs and analyze the impact of the bid-ask spread in the
price response functions.
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