20. High Frequency Finance: Using Scaling Laws to Build Trading Models

  1. Jessica James,
  2. Ian W. Marsh3 and
  3. Lucio Sarno3,4
  1. Alexandre Dupuis1,2 and
  2. Richard B. Olsen1,2

Published Online: 8 OCT 2012

DOI: 10.1002/9781118445785.ch20

Handbook of Exchange Rates

Handbook of Exchange Rates

How to Cite

Dupuis, A. and Olsen, R. B. (2012) High Frequency Finance: Using Scaling Laws to Build Trading Models, in Handbook of Exchange Rates (eds J. James, I. W. Marsh and L. Sarno), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118445785.ch20

Editor Information

  1. 3

    Cass Business School, London, UK

  2. 4

    CEPR, UK

Author Information

  1. 1

    Olsen Ltd., Zurich, Switzerland

  2. 2

    Centre for Computational Finance and Economic Agents (CCFEA), University of Essex, UK

Publication History

  1. Published Online: 8 OCT 2012
  2. Published Print: 14 JUN 2012

ISBN Information

Print ISBN: 9780470768839

Online ISBN: 9781118445785



  • currency markets;
  • foreign exchange (FX) market;
  • high frequency finance;
  • intrinsic time framework;
  • monthly statistics;
  • scale of market quakes (SMQ);
  • scaling laws;
  • trading models


The availability of large amounts of tick-by-tick data, in excess of 50,000 data points per day, oanda, ebs has opened up new opportunities for model building. It is now possible to follow an empirical approach and develop models bottom up by analyzing empirical data and searching for statistical properties. This chapter proposes a different way to analyze high frequency data: an event-based approach in which the time series is dissected based on market events where the direction of the trend changes from up to down or vice versa, and defines the event-based framework in some detail. This is followed by a detailed presentation on the scaling laws. The chapter introduces the scale of market quakes (SMQ) and analyzes SMQ events during the course of several years for major currency pairs. The main features of the trading model algorithm are then described, where monthly statistics of executed trades are discussed.

Controlled Vocabulary Terms

currency excess returns; finance; foreign exchange markets; intrinsic time framework; monthly statistics; scale of market quakes; scaling laws; trading models