EconPapers    
Economics at your fingertips  
 

Price Formation in the Foreign Exchange Market

Florent Gallien, Sergei Glebkin, Serge Kassibrakis, Semyon Malamud and Alberto Teguia
Additional contact information
Florent Gallien: Swissquote
Sergei Glebkin: INSEAD
Serge Kassibrakis: Swissquote
Semyon Malamud: Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute
Alberto Teguia: UBC Sauder

No 23-68, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study joint price formation in the dealer-to-dealer (D2D) and dealer-to-customer (D2C) segments of the foreign exchange (FX) market, both theoretically and empirically. Our theory accounts for dealer heterogeneity, market power, and non-exclusive customer-dealer relationship and shows that several statistics of the cross-section of D2C quotes help predict D2D prices and liquidity. In particular, D2D prices are negatively related to cross-sectional covariance between D2C mid-quotes and spreads, contrary to predictions of other theories of two-tiered markets. Our predictions are confirmed empirically using unique proprietary D2C data. Model calibration reveals and quantifies the FX market’s inelasticity and non-competitiveness.

Keywords: Liquidity; Foreign Exchange; OTC markets; Price Impact; Market Power (search for similar items in EconPapers)
JEL-codes: F31 G12 G14 G21 (search for similar items in EconPapers)
Pages: 111 pages
Date: 2023-08
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-mst
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4554523 (application/pdf)

Related works:
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:chf:rpseri:rp2368

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().

 
Page updated 2024-03-31
Handle: RePEc:chf:rpseri:rp2368