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Asymetric Information and the Foreign-Exchange Trades of Global Custody Banks

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Author Info

  • Carol Osler

    ()
    (International Business School, Brandeis University)

  • Tanseli Savaser

    ()
    (Williams College)

  • Thang Tan Nguyen

    (International Business School, Brandeis University)

Abstract

We analyze currency trading between custody banks and their client funds, a trading situation notable for extreme opacity and ongoing legal disputes about reputedly high markups. We propose a “shrouding” model of liquidity provision in which prices are set relative to the day’s extrema to preserve client uncertainty about execution costs. Using the complete 2006 currency trading record of a custody bank, we support this hypothesis with numerous tests. Our analysis of the client funds indicates that they recognize the high costs of standard custodial trades and raises the possibility that they trade through custodians to shroud execution-cost information from underlying investors.

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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP55.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 55.

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Length: 42 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:brd:wpaper:55

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Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/
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Keywords: Bid-ask Spread; Exchange Rates; Microstructure; Shrouding; Custody Bank;

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Cited by:
  1. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.

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