The Market Nanostructure Origin of Asset Price Time Reversal Asymmetry

19 Pages Posted: 12 Jan 2019

See all articles by Marcus Cordi

Marcus Cordi

CentraleSupélec

Damien Challet

CentraleSupélec; Encelade Capital SA

Serge Kassibrakis

Swissquote Bank

Date Written: December 28, 2018

Abstract

We introduce a framework to infer lead-lag networks between the states of elements of com- plex systems, determined at different timescales. As such networks encode the causal structure of a system, infering lead-lag networks for many pairs of timescales provides a global picture of the mutual influence between timescales. We apply our method to two trader-resolved FX data sets and document strong and complex asymmetric influence of timescales on the structure of lead-lag networks. Expectedly, this asymmetry extends to trader activity: for institutional clients in our dataset, past activity on timescales longer than 3 hours is more correlated with future activity at shorter timescales than the opposite (Zumbach effect), while a reverse Zumbach ef- fect is found for past timescales shorter than 3 hours; retail clients have a totally different, and much more intricate, structure of asymmetric timescale influence. The causality structures are clearly caused by markedly different behaviors of the two types of traders. Hence, market nano- structure, i.e., market dynamics at the individual trader level, provides an unprecedented insight into the causality structure of financial markets, which is much more complex than previously thought.

Keywords: Time Reversal Asymmetry, Statistically Validated Networks, Lead-Lag Networks

JEL Classification: C02, C19

Suggested Citation

Cordi, Marcus and Challet, Damien and Kassibrakis, Serge, The Market Nanostructure Origin of Asset Price Time Reversal Asymmetry (December 28, 2018). Available at SSRN: https://ssrn.com/abstract=3309170 or http://dx.doi.org/10.2139/ssrn.3309170

Marcus Cordi (Contact Author)

CentraleSupélec ( email )

Labo MICS
3, rue Joliot-Curie
Gif-sur-Yvette, 91192
France

Damien Challet

CentraleSupélec ( email )

Labo MICS
3, rue Joliot-Curie
Gif-sur-Yvette, 91192
France

Encelade Capital SA ( email )

Chemin du Bochet 8
Sulpice, 1025
Switzerland

Serge Kassibrakis

Swissquote Bank ( email )

Ch. de la Crétaux 33
Gland, Vaud 1196
Switzerland

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