Econophysics: A challenge to econometricians

• Presents an econophysics alternative to mainstream econometric models.
• Using entropy analysis demonstrates how the main assumption used commonly in mainstream econometrics is violated on small time scales.
• Models short-term fluctuations in the foreign exchange markets using an adapted Ising spin model.
• Shows how to build high-frequency foreign exchange trading models based on econophysics.

The study contrasts mainstream economics–operating on time scales of hours and days–with behavioural finance, econophysics and high-frequency trading, more applicable to short-term time scales of the order of minutes and seconds. We show how the central theoretical assumption underpinning prevailing economic theories is violated on small time scales. We also demonstrate how an alternative behavioural econophysics can model reactions of market participants to short-term movements in foreign exchange markets and, in a direct contradiction of the orthodox economics, design a rudimentary IsingFX automated trading system.By replacing costly human forex dealers with banks of Field-Programmable Gate Array (FPGA) devices that implement in hardware high-frequency behavioural trading models of the type described here, brokerages and forex liquidity providers can expect to gain significant reductions in operating costs.