Tests of Microstructural Hypotheses in the Foreign Exchange Market

Richard Lyons ()

No 4471, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper introduces a three-part transactions dataset to test various microstructural hypotheses about the spot foreign exchange market. In particular, we test for effects of trading volume on quoted prices through the two channels stressed in the literature: the information channel and the inventory-control channel. We find that trades have both a strong information effect and a strong inventory-control effect, providing support for both strands of microstructure theory. The bulk of equity-market studies also find an information effect; however, these studies typically interpret this as evidence of inside information. Since there are no insiders in the foreign exchange market, this finding suggests a broader conception of the information environment, at least in this context.

JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 1993-09
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Journal of Financial Economics, October 1995, vol. 39, pp. 321-351
Published as Microstructure: The Organization of Trading and Short-Term Price Behavior, Stoll, E., ed.: Elgar Publishing, April 1999, pp. 409-439.

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