Fractal markets hypothesis and Inversion: Difference between pages

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(Expand explanation of base currency, for clarity.)
 
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(FMH).
1.


The fractal markets hypothesis is an evolving model of investor and market behaviour which identifies repeating patterns in market prices and conditions.
A term used in foreign exchange rate quotation.


The FMH may explain why extreme negative (and positive) outturns are observed more frequently in real financial markets than predicted by simpler efficient market models.


'''Example'''


Under the FMH, a key contributory factor is the difference in investment time horizons between different classes of market participants.
Consider the historical FX quote:


1 GBP = USD 1.4598 - 1.4602.


If the FMH is borne out in practice, then real financial markets are significantly less stable than predicted and described by more traditional market models.
The base currency is GBP.


This is the currency there is a single unit of, to be exchanged for a variable number of USD.




== See also ==
The inversion of this FX quote means expressing the same price, but with the other currency as the base currency (USD here):
 
1 USD = GBP ( 1 / 1.4602 ) - ( 1 / 1.4598 )
 
1 USD = GBP 0.6848 - 0.6850.
 
 
In the inverted FX quote, USD is the currency there is a single unit of (to be exchanged for a variable number of GBP).
 
 
2.
 
In any market, the reversal of a normal - or commonly expected - relationship.


*  [[Efficient market hypothesis]]
For example the situation of an Inverse yield curve, where longer maturities of funds are trading at LOWER yields than shorter-dated maturities (being the opposite of the normally expected upward-sloping relationship).
*  [[Behavioural economics]]


==Other links==


* [http://www.bankofengland.co.uk/research/Pages/fspapers/fs_paper23.aspx Bank of England Financial Stability Paper No 23]
== See also ==
* [[Base currency]]
* [[Foreign exchange]]
* [[Inverse quote]]
* [[Inverse yield curve]]


[[Category:Capital_Markets_and_Funding]]
[[Category:Manage_risks]]
[[Category:Risk_Management]]

Revision as of 16:02, 16 March 2015

1.

A term used in foreign exchange rate quotation.


Example

Consider the historical FX quote:

1 GBP = USD 1.4598 - 1.4602.

The base currency is GBP.

This is the currency there is a single unit of, to be exchanged for a variable number of USD.


The inversion of this FX quote means expressing the same price, but with the other currency as the base currency (USD here):

1 USD = GBP ( 1 / 1.4602 ) - ( 1 / 1.4598 )

1 USD = GBP 0.6848 - 0.6850.


In the inverted FX quote, USD is the currency there is a single unit of (to be exchanged for a variable number of GBP).


2.

In any market, the reversal of a normal - or commonly expected - relationship.

For example the situation of an Inverse yield curve, where longer maturities of funds are trading at LOWER yields than shorter-dated maturities (being the opposite of the normally expected upward-sloping relationship).


See also

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