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Abstract

This article provides an analysis of empirical microstructure for the BRL/US$ exchange rate market using high-frequency bid and ask quote data. The aims of the article are to verify the importance of the presence of asymmetric information in price dynamics, to build a model for the price discovery process and to analyze the empirical determinants of the spread between bid and ask through a conditional model that captures an asymmetric response to the spread regarding past information. The asymmetric information hypothesis is tested through a nonparametric test of conditional independence for the Markov property. A model for price discovery is built using a vector error correction between bid and ask, controlling for duration and volatility. As a result of this vector, we build an equilibrium spread deviation series, and we show that the conditional distribution of equilibrium spread deviations responds asymmetrically to the spread changes and expected conditional volatilities and durations. This is made by using the quantilogram and a quantile autoregression as tools for modeling the asymmetry effects. We relate the findings to some facts presented in the theoretical literature on market microstructure.

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File URL: http://www.sciencedirect.com/science/article/B6W69-4TTHWDD-2/2/cc37dbef7135397c3ef4238f0cb147d1
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Bibliographic Info

Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 9 (2008)
Issue (Month): 4 (December)
Pages: 247-265

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Handle: RePEc:eee:ememar:v:9:y:2008:i:4:p:247-265

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Web page: http://www.elsevier.com/locate/inca/620356

Related research

Keywords: Market microstructure Emerging market Spread Markov property Asymmetric response Quantile regression;

References

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20. Bingcheng Yan & Eric Zivot, 2003. "Analysis of High-Frequency Financial Data with S-PLUS," Working Papers UWEC-2005-03, University of Washington, Department of Economics.
21. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.

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