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244 Risk management technology in financial services
The notion underlying microseasonality is that in short-term intervals market price
changes have more relevant movements leading to changes in amplitude, magnitude
or direction. The higher the resolution and the smaller the intervals, the larger the
number of relevant price movements which can be detected and analysed.
The tracking of microseasonality, and of intrinsic time, requires high frequency
financial data (HFFD, section 13.2). In terms of the three main market areas
America, Europe and East Asia active market time can be shown as frequency dis-
tributions overlapping according to the common time windows. The fact that within
the broader twenty-four-hour global financial market the interaction of players and
market segments is done at different timescales leads to such effects as the creation of:
Volatility clusters,
Lags between price adjustments,
A number of abrupt interruptions of trends, and
Other factors which significantly affect market liquidity.
In general terms, liquidity means that part of our wealth can be held in a form whose
cash value is readily available in case of unforeseen contingencies. More specifically,
transaction liquidity facilitates the ordinary purchase and sale of goods and services.
Market liquidity is based on the demand and supply of money, and economists use
many ways to split up demand for money. One of the best and most convenient is to
distinguish two crucial parts:
Liquidity reasons, and
Transaction reasons.
2
Classical economics considers market liquidity to fit well with the concept of market
efficiency because it assumes that by definition an efficient market is one which is
very large, has many players, and has somebody to look after it (the central bank).
But the globalization of markets means that this theory no longer holds much weight.
Even the US, which is a large market with many participants, does not fit the classi-
cal description as US investors turn their attentions to Mexico, Turkey, Indonesia and
other emerging markets which are outside the Federal Reserve’s jurisdiction. At the
same time, global market perspectives see to it that the shorter are recorded intervals
in the trading horizon, the greater tend to be investment opportunity associated with
a dealing activity, and the better is the information we need for risk control.
13.2 High frequency financial data
‘To make money the dealer has to have an edge,’ suggested Stanley Ross, the British
financial expert, in his 1992 Edmond Israel Foundation lecture in Luxembourg. The
same is true of the profitable company, which is doing better than its competitors
because it remains at the cutting edge through the able use of:
Human capital,
Innovative instrument,

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