Evolution of FX Markets via Globalization of Capital

Conference paper
Part of the NATO Science for Peace and Security Series B: Physics and Biophysics book series (NAPSB)


This paper is about money, and why today’s foreign exchange (FX) markets are unstable. According to the literature [1], FX markets were fundamentally different before and after WW I. Any attempt to discuss this topic within standard economic theory necessarily fails because money/liquidity/uncertainty is completely excluded from that theory [2]. Fortunately, our market dynamics models adequately serve our purpose. Eichengreen [1] has presented a stimulating history of the evolution of FX markets from the gold standard of the late nineteenth century through the Bretton Woods Agreement (post WWII–1971) and later the floating currencies of our present market deregulation era (1971–present). He asserts a change from stability to instability over the time interval of WWI. Making his argument precise, we describe how speculators could have made money systematically from a market in statistical equilibrium. The present era normal liquid FX markets are in contrast very hard, to a first approximation impossible, to beat, and consequently are described as ‘martingales’. The ideas of martingales and options/hedging were irrelevant in the pre-WWI era. I end my historical discussion with the empirical evidence for the stochastic model that describes FX market dynamics quantitatively accurately during the last 7–17 years [3].


FX market instability martingales options and hedging 


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© Springer Science + Business Media B.V 2008

Authors and Affiliations

  1. 1.Physics DepartmentUniversity of HoustonHouston

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