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Measuring Shock In Financial Markets

Author

Listed:
  • GILLES O. ZUMBACH

    (Olsen & Associates, Research Institute for Applied Economics, Seefeldstrasse 233, 8008 Zürich, Switzerland)

  • MICHEL M. DACOROGNA

    (Olsen & Associates, Research Institute for Applied Economics, Seefeldstrasse 233, 8008 Zürich, Switzerland)

  • JØRGEN L. OLSEN

    (Olsen & Associates, Research Institute for Applied Economics, Seefeldstrasse 233, 8008 Zürich, Switzerland)

  • RICHARD B. OLSEN

    (Olsen & Associates, Research Institute for Applied Economics, Seefeldstrasse 233, 8008 Zürich, Switzerland)

Abstract

Analogous to the Richter scale for earthquakes, we introduce the Scale of Market Shocks (SMS), an "event" scale to quantify the size of shocks in financial markets. It is based on price volatilities and computed by integrating volatilities over time horizons ranging from 1 hour to 42 days. The SMS is computed using quality high frequency market data and can be constructed for any market.We compute the SMS for the foreign exchange market. For two major FX rates, we study the relation between SMS peaks and major "world events". We measure also the correlation between the Scale of Market Shocks index and the size of the subsequent price movements and show a high correlation for short time intervals.

Suggested Citation

  • Gilles O. Zumbach & Michel M. Dacorogna & Jørgen L. Olsen & Richard B. Olsen, 2000. "Measuring Shock In Financial Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 347-355.
    • Handle: RePEc:wsi:ijtafx:v:03:y:2000:i:03:n:s0219024900000188
    DOI: 10.1142/S0219024900000188
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    Cited by:

    1. T. Bisig & A. Dupuis & V. Impagliazzo & R. B. Olsen, 2009. "The scale of market quakes," Papers 0909.1690, arXiv.org.
    2. Pasca Lucian, 2015. "A Critical Review of the Main Approaches on Financial Market Dynamics Modelling," Journal of Heterodox Economics, Sciendo, vol. 2(2), pages 151-167, December.
    3. Kaldasch, Joachim, 2014. "Evolutionary model of stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 449-462.

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