An Empirical Investigation into the Dynamics of High Frequency Price Jumps in Listed Markets

  • Abdoulaye Alpha Kane

Student thesis: Doctoral Thesis

Abstract

ABSTRACT
The aim of this thesis is to examine the high frequency price jumps in both the foreign exchange(FX) and cryptocurrency markets. We aim to contribute to the literature by expanding upon the existing mi- crostructure literature in both asset classes. Over the past several years financial markets in particular FX or electronic FX( eFX) have become increasingly electronified. The continued electronification of financial markets has led to substantial increases in both the speed and volume of trading with many exchanges now operating at a max round trip time of 10ms. This electronification of financial markets has had several impacts on price jumps. Firstly, the frequency and severity of price jumps is now more pronounced. Trend following algos push prices to extreme outliers before human traders respond. This can be particularly problematic for participants such as voice brokers who are ill prepared for the future of FX.
This electronification of FX means that competent high frequency traders can detect and potentially exploit price jumps at the expense of slower participants.Finally electronification of markets has increased the complexity and interconnectedness of markets. In this increasingly faster paced environment under- standing the causes of price jumps in these markets should be of interest to non directional market makers and investors.
With this in mind, our first Chapter will serve as an introduction to the topic of price jumps and further discuss the motivation for studying price jumps. We will further discuss the thesis aims and objectives while concluding with a description of the significance of the study as well as outlining the structure of the remaining chapters. In chapter two we will conduct an in depth review of the literature on the existing studies of price jumps in financial markets. We will introduce the literature from the original currency crisis models to the various liquidity measures and jump tests we will employ to complete our study. We will examine the history of jump studies from the early Merton model of the 1970s to the more recent intraday analyses of Lee and Mykland(2008). In chapter 3 we will analyze price jumps in the FX futures market and explore the factors which contribute to the probability of price jumps occurring. In chapter 4 we will examine the impact of tweets by former President Trump during the US- China trade war and investigate what impact they may have had on price jumps in FX markets. In Chapter 5, we will test for price jumps in the nascent cryptocurrency market and examine whether price jumps in this asset class differ from those detected in FX. Finally, we will conclude this this with chapter 6 where we will summarize our findings and make suggestions for further research of this fascinating topic

Date of Award7 May 2024
Original languageEnglish
Awarding Institution
  • University of Portsmouth
SupervisorEverton Dockery (Supervisor) & Konstantinos Vergos (Supervisor)

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