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Optimal Informed Trading in the Foreign Exchange Market

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Author Info
Vitale, Paolo

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Abstract

We formulate a market microstructure model of exchange determination we employ to investigate the impact of informed trading on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show how strategic informed agents influence exchange rates via both portfolio-balance and information effects. We outline the connection which exists between the private value of information, market efficiency, liquidity and exchange rate volatility. Our model is also consistent with recent empirical research on the microstructure of FX markets.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6553.

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Date of creation: Nov 2007
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Handle: RePEc:cpr:ceprdp:6553

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Related research
Keywords: exchange rate dynamics; foreign exchange micro structure; order flow; private information;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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This page was last updated on 2009-11-25.

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