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Price-setting in the foreign exchange swap market: Evidence from order flow

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  • Olav Syrstad
  • Ganesh Viswanath-Natraj

Abstract

This paper investigates price discovery in foreign exchange (FX) swaps. Using data on inter-dealer transactions, we find that a 1 standard deviation increase in order flow (i.e. net pressure to obtain USD through FX swaps) increases the cost of dollar funding by up to 4 basis points after the 2008 crisis. This is explained by increased dispersion in dollar funding costs and quarter-end periods. We find central bank swap lines reduced the order flow to obtain USD through FX swaps, subsequently affecting the forward rate. In contrast, during quarter-ends and monetary announcements we observe high frequency adjustment of the forward rate.

Suggested Citation

  • Olav Syrstad & Ganesh Viswanath-Natraj, 2020. "Price-setting in the foreign exchange swap market: Evidence from order flow," Working Paper 2020/16, Norges Bank.
    • Handle: RePEc:bno:worpap:2020_16
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    File URL: https://hdl.handle.net/11250/2690236
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    References listed on IDEAS

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    More about this item

    Keywords

    interest rate parity; exchange rates; currency swaps; order flow; dollar funding;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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