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Asymmetric responses of ask and bid quotes to information in the foreign exchange market

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  • Chen, Yu-Lun
  • Gau, Yin-Feng

Abstract

We study the price discovery in a foreign exchange electronic limit order market on a daily basis, by examining the informativeness of ask and bid quotes in the process of price formation. Using the data of prices and trades in the Euro–Dollar spot market via Electronic Broking Services (EBS), we find bid quotes provide more price discovery. This dominance of bid quotes in price discovery is stronger on Monday and is weaker on Friday. Asymmetries in the responses of ask and bid quotes to trade-related information evolve with daily order flow, daily return, the interactive term between spread and order flow, and the volatility, skewness, and kurtosis in the distribution of efficient exchange rate changes.

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  • Chen, Yu-Lun & Gau, Yin-Feng, 2014. "Asymmetric responses of ask and bid quotes to information in the foreign exchange market," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 194-204.
    • Handle: RePEc:eee:jbfina:v:38:y:2014:i:c:p:194-204
    DOI: 10.1016/j.jbankfin.2013.10.004
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    Cited by:

    1. Chen, Yu-Lun & Gau, Yin-Feng, 2015. "Foreign exchange market intervention and price discovery," Journal of the Japanese and International Economies, Elsevier, vol. 38(C), pages 214-227.
    2. Liwei Jin & Xianghui Yuan & Li Peiran & Hailun Xu & Feng Lian, 2023. "Option features and price discovery in convertible bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(3), pages 384-403, March.
    3. Piccotti, Louis R. & Schreiber, Ben Z., 2020. "Information shares in a two-tier FX market," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 19-35.
    4. Liwei Jin & Xianghui Yuan & Shihao Wang & Peiran Li & Feng Lian, 2022. "Trades or quotes: Which drives price discovery? Evidence from Chinese index futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(12), pages 2235-2247, December.
    5. Wu, Zhen-Xing & Gau, Yin-Feng & Chen, Yu-Lun, 2023. "Price discovery and triangular arbitrage in currency markets," Journal of International Money and Finance, Elsevier, vol. 137(C).

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    More about this item

    Keywords

    Price discovery; Information share; Common factor weight; Bid–ask spread; Order flow;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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