How well can autoregressive duration models capture the price durations dynamics of foreign exchanges?

In this chapter, using the omnibus tests developed in Hong, Li and Zhao (2004); Egorov, Hong and Li (2004), we examine whether commonly used ACD models can well forecast the probability density of foreign exchange price durations. The foreign exchange market is one of the most important financial markets in the world, with trading taking place 24 hours a day around the globe and trillions of dollars of different currencies transacted each day. Transactions in the foreign exchange market determine the rates at which currencies are exchanged, which in turn determine the costs of purchasing foreign goods and assets.