Price-setting in the foreign exchange swap market: Evidence from order flow

Olav Syrstad and Ganesh Viswanath-Natraj

No 2020/16, Working Paper from Norges Bank

Abstract: This paper investigates price discovery in foreign exchange (FX) swaps. Using data on inter-dealer transactions, we find that a 1 standard deviation increase in order flow (i.e. net pressure to obtain USD through FX swaps) increases the cost of dollar funding by up to 4 basis points after the 2008 crisis. This is explained by increased dispersion in dollar funding costs and quarter-end periods. We find central bank swap lines reduced the order flow to obtain USD through FX swaps, subsequently affecting the forward rate. In contrast, during quarter-ends and monetary announcements we observe high frequency adjustment of the forward rate.

Keywords: interest rate parity; exchange rates; currency swaps; order flow; dollar funding (search for similar items in EconPapers)
JEL-codes: E43 F31 G15 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-mst
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https://hdl.handle.net/11250/2690236

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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2020_16

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