Price Discovery in Currency Markets

Carol Osler, Alexander Mende () and Lukas Menkhoff

No 3, Working Papers from Brandeis School of Business and Economics

Abstract: This paper examines the price discovery process in currency markets, basing its analysis on the pivotal distinction between the customer (end-user) market and the interdealer market. It first provides evidence that the price discovery process cannot be based on adverse selection between dealers and end users, as postulated in standard equity-market models, because the spreads dealers quote to their customers are not positively related to a trade’s likely information content. The paper then highlights three hypotheses from the literature – fixed operating costs, market power, and strategic dealing – that may explain the cross-sectional variation in customers spreads. The paper finishes by proposing a price discovery process relevant to liquid two-tier markets and providing preliminary evidence that this process applies to currencies.

Keywords: Bid-ask spreads; foreign exchange; asymmetric information; microstructure; price discovery; interdealer; inventory; market order; limit order (search for similar items in EconPapers)
JEL-codes: F31 G14 G15 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2010-06
New Economics Papers: this item is included in nep-ifn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP03.pdf First version, 2010 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Journal Article: Price discovery in currency markets (2011)
Working Paper: Price Discovery in Currency Markets (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:03

Access Statistics for this paper

More papers in Working Papers from Brandeis School of Business and Economics Contact information at EDIRC.
Bibliographic data for series maintained by Pin-Lun Lee ().