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Tests of Microstructural Hypotheses in the Foreign Exchange Market

Richard Lyons ()

No RPF-230, Research Program in Finance Working Papers from University of California at Berkeley

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.

Date: 1993-08-01
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Journal Article: Tests of microstructural hypotheses in the foreign exchange market (1995) Downloads
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