Theoretical Analysis of Exchange Rate Fluctuations and Applied Analysis of High Frequency Data

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This theoretical and empirical research dealt with the unique data set that comes from the trading platform, EBS, of the major exchange rates. The record includes limit orders, deal prices and deal volumes, among others, in one-second time slice. The research belongs to a growing literature using the high-frequency data set. The following results were found in the research; Just before and after the announcement of important macroeconomic variables, the surprise (-actual - expected) components causes a fast movement in the exchange rate in the direction consistent with theory; The exchange rate movement in the second frequency is not consistent with a random walk hypothesis but with momentum trading strategy; Arbitrage opportunities in the form of negative spread and triangular arbitrage do exist, primarily because of credit lines among banks that are involved. However, the frequency and duration of such arbitrage opportunities have declined since 2005. The trend is correlated with the number of banks’ computers directly connected to the EBS system.