Conditional Probabilistic Analysis of Trade Ticks in Currency Derivatives Markets

Abstract

By examining the conditional probability structure of the price returns in USD/INR currency futures and options across Indian exchanges (the National Stock Exchange, the Bombay Stock Exchange, and the Metropolitan Stock Exchange of India), a higher degree of mean reversion is observed for an aggregated trade set of exchanges when compared to individual exchanges. Trade tick data for the exchanges, independently and aggregated, for a period of one month (July 2015) is examined. We show that the probability of mean reversion is higher at the aggregated level than at individual exchanges, and currency options contain valuable information regarding currency futures price movements. The understanding of the price movement is of great importance to high-frequency traders and institutional players. This study provides evidence that any trend analysis, whether reversion to mean or trend continuation, should be examined along with group of related instruments and exchanges.