The Forex Market as an Elastic Network Model

The efficient market hypothesis (EMH) affirms that asset prices should reveal all available information (a.k.a market efficiency). Therefore, it is impossible to "beat the market" always on a risk-adjusted basis since market prices should only respond to new information. The concept of efficiency in the capital markets is something difficult to test, mainly because of the market and the economic conditions are continuously changing. Here, we propose a new model to validate the EMH that is inspired on an elastic network model. More specifically, we are applying this comparison to Foreign Exchange (FOREX) market under some restrictive conditions. In our hypothesis, several interaction potentials (such as Hooke) are used to characterize the interaction between banks and each particular quotation. This hypothesis comes from the study of several natural systems, like macromolecules in dissolution. An algorithm based on Montecarlo methods is also presented to predict the systems evolution.