The Forex Market as an Elastic Network Model

Abstract

The efficient market hypothesis (EMH) affirms that asset prices should reveal all available information. Therefore, it is impossible to "beat the market" always on a risk-adjusted basis since market prices should only respond to new information. Here, we propose a new model to validate the EMH that is inspired on an elastic network model. More specifically, we apply this comparison to Foreign Exchange (FOREX) market under some restrictive conditions. In our hypothesis, several interaction potentials are used to characterize the interaction between banks and each particular quotation. This hypothesis comes from the study of several natural systems, such as macromolecules in solution. An algorithm based on the Monte Carlo methods is also presented in order to predict the evolution of the system.