TY - JOUR AU - Hashimoto,Yuko AU - Ito,Takatoshi AU - Ohnishi,Takaaki AU - Takayasu,Misako AU - Takayasu,Hideki AU - Watanabe,Tsutomu TI - Random Walk or A Run: Market Microstructure Analysis of the Foreign Exchange Rate Movements based on Conditional Probability JF - National Bureau of Economic Research Working Paper Series VL - No. 14160 PY - 2008 Y2 - July 2008 UR - http://www.nber.org/papers/w14160 L1 - http://www.nber.org/papers/w14160.pdf N1 - Author contact info: Yuko Hashimoto Statistics Department International Monetary Fund 700 19th Street, NW Washington D.C., 20431 E-Mail: yhashimoto@imf.org Takatoshi Ito Graduate School of Economics University of Tokyo 7-3-1 Hongo, Bunkyo-ku Tokyo 113-0033 JAPAN Tel: 81-3-5841-5608 Fax: 81-3-5841-5521 E-Mail: ITOINTOKYO@aol.com Takaaki Ohnishi Graduate School of law and Politics University of Tokyo 7-3-1 Hongo, Bunkyo-ku Tokyo 113-0033, Japan E-Mail: ohnishi@sat.t.u-tokyo.ac.jp Misako Takayasu Department of Computational Intelligence and Syste 4259-G3-52 Nagatsuta-cho, Midori-ku Yokohama, 226-8502, Japan E-Mail: takayasu@dis.titech.ac.jp Hideki Takayasu 3-14-13 Higashigotanda, Shinagawa-ku Tokyo 141-0022, Japan E-Mail: takayasu@csl.sony.co.jp Tsutomu Watanabe Hitotsubashi University Institute of Economic Research Naka 2-1, Kunitachi, Tokyo 186-8603 JAPAN Tel: 81-42-580-8358 Fax: 81-42-580-8333 E-Mail: tsutomu.w@srv.cc.hit-u.ac.jp AB - 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. ER -