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A Unifying Microstructure Framework for Modeling Intraday and Interday Asset Pricing Dynamics: the Case of Exchange Rates

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  • Thierry Chauveau
  • Richard Topol

Abstract

A model of the dynamics of intradaily exchange rates is presented. The current Over‐The‐Counter (OTC) exchange rate is the quote of the quoting bank.Two polar cases are considered: (i) If each bank is able to observe the noises relative to the orders of its own clients, then the OTC exchange rate is shown to obey a random walk with a constant conditional variance. (ii) If each bank is not able to observe the noises relative to the orders of its own clients, the OTC exchange rate is no more a random walk and conditional heteroskedasticity appears.

Suggested Citation

  • Thierry Chauveau & Richard Topol, 1999. "A Unifying Microstructure Framework for Modeling Intraday and Interday Asset Pricing Dynamics: the Case of Exchange Rates," European Financial Management, European Financial Management Association, vol. 5(3), pages 341-368, November.
    • Handle: RePEc:bla:eufman:v:5:y:1999:i:3:p:341-368
    DOI: 10.1111/1468-036X.00099
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