Price Discovery in Currency Markets

Carol Osler, Alexander Mende () and Lukas Menkhoff

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: This paper makes three contributions to our understanding of the price discovery process in currency markets. First, it provides evidence that this process cannot be the familiar one based on adverse selection and customer spreads, since such spreads are inversely related to a trade's likely information content. Second, the paper suggests three potential sources for the pattern of customer spreads, two of which rely on the information structure of the market. Third, the paper suggests an alternative price discovery process for currencies, centered on inventory management strategies in the interdealer market, and provides preliminary evidence for that process.

Keywords: Bid-ask spread; 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: 48 pages
Date: 2006-11
New Economics Papers: this item is included in nep-cfn, nep-ifn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (54)

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http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-351.pdf (application/pdf)

Related works:
Journal Article: Price discovery in currency markets (2011)
Working Paper: Price Discovery in Currency Markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:han:dpaper:dp-351

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