Structural Interdependence of Price and Demand in a Model of the Foreign Exchange Market with Heterogeneous Speculators: Evidence from High-frequency Data

Leonardo Bargigli () and Giulio Cifarelli ()

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: We assume that the variations of the exchange rate depend on the current net demand of the base currency as a consequence of market making, and that the current net demand of the base currency depends on current and past variations of the exchange rate as a consequence of how future price expectations are formed by bounded rational agents. We achieve identification supposing that the structural shocks of price variations and demand follow a GARCH process. Using high-frequency transaction data of the EUR/USD market in 2016, we show that the simultaneous effects of price on demand and viceversa are both significant and positive. Our estimates suggest that one important source of heterogeneity in demand might be missing from our model, since the structural errors are negatively correlated.

Keywords: Asset pricing model; heterogeneous beliefs; market making; foreign exchange market; SVAR-GARCH; high frequency data. (search for similar items in EconPapers)
JEL-codes: C32 C55 D84 F31 G12 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2020
New Economics Papers: this item is included in nep-mst and nep-ore
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.disei.unifi.it/upload/sub/pubblicazioni/repec/pdf/wp04_2020.pdf (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:frz:wpaper:wp2020_04.rdf

Access Statistics for this paper

More papers in Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa Via delle Pandette 9 50127 - Firenze - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Giorgio Ricchiuti ().