The Market Microstructure Approach to Foreign Exchange: Looking Back and Looking Forward

Michael King (), Carol Osler () and Dagfinn Rime
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Michael King: Ivey Business School, University of Western Ontario
Carol Osler: International Business School, Brandeis University

No 54, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: Looking back, 30 years of research on foreign exchange (FX) market microstructure reveals that order flow, heterogeneity among agents, and private information are crucial determinants of short-run exchange rate dynamics. Microstructure researchers have produced empirically-driven models that fit the data surprisingly well. But currency markets are evolving rapidly in response to new electronic trading technologies. Transparency has risen, trading costs have tumbled, and transaction speed has accelerated as new players have entered the market and existing players have modified their behavior. These changes will have profound effects on exchange rate dynamics. Looking forward, we highlight fundamental yet unanswered questions on the nature of private information, the impact on market liquidity, and the changing process of price discovery. We also outline potential microstructure explanations for long-standing exchange rate puzzles.

Keywords: Exchange rates; Market microstructure; Information; Liquidity; Electronic trading (search for similar items in EconPapers)
JEL-codes: C42 C82 F31 G12 G15 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2012-10
New Economics Papers: this item is included in nep-mon and nep-mst
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Citations: View citations in EconPapers (3)

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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP54.pdf First version, 2012 (application/pdf)

Related works:
Journal Article: The market microstructure approach to foreign exchange: Looking back and looking forward (2013)
Working Paper: The market microstructure approach to foreign exchange - Looking back and looking forward (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:54

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