The Role of Foreign Exchange Dealers in Providing Overnight Liquidity
AbstractThis paper illustrates that dealers in foreign exchange markets not only provide intraday liquidity, they are key participants in the provision of overnight liquidity. Dealing institutions receive compensation for holding undesired inventory balances in part from the information they receive in customer trades. These flows can be used to forecast future movements in the exchange rate. Findings suggest that Canadian dealers, as a group and individually, are more likely to provide interday liquidity to foreign rather than Canadian financial customers. Financial institutions operating in multiple price-correlated markets manage their risky positions across markets. An interdependent relationship is revealed between the supply of liquidity provided by non-financial firms and dealing institutions across time, and across markets.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 08-44.
Length: 45 pages
Date of creation: 2008
Date of revision:
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Exchange rates; Market structure and pricing; Financial markets;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-25 (All new papers)
- NEP-IFN-2008-11-25 (International Finance)
- NEP-MST-2008-11-25 (Market Microstructure)
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