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Real Trading Patterns and Prices in Spot Foreign Exchange Markets

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  • Jon Danielsson

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  • Richard Payne

Abstract

Most of the existing empirical literature on FX market microstructure uses indicative quote data derived from Reuters EFX Screens. This paper examines the adequacy of such data as proxies for firm, tradeable quotes. We present a comparison of prices (and volumes) derived from Reuters D2000-2 electronic inter-dealer broking system with contemporaneous data from EFX. Tick-by-tick data is available from both sources, covering October 6-10, 1997. Our main comparative results are as follows. EFX midquote returns are consistently more volatile than their D2000-2 counterparts and display strong moving average effects which are not present in the D2000-2 returns. EFX spreads bear little or no relation to the inside spreads derived from D2000-2. In terms on information flows, D2000-2 returns lead those on EFX by up to 3 minutes and, further contribute around 90% of all information impounded in quotes. A bivariate GARCH analysis also indicates a dominant role for D2000-2 in price discovery. On the positive side, however, EFX quotation frequency correlates well with D2000-2 transaction frequency.

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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp320.

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Date of creation: Apr 1999
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Handle: RePEc:fmg:fmgdps:dp320

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Web page: http://www.lse.ac.uk/fmg/

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  1. De Jong, Frank & Mahieu, Ronald & Schotman, Peter, 1998. "Price discovery in the foreign exchange market: an empirical analysis of the yen/dmark rate1, 2," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 5-27, February.
  2. Bollerslev, Tim & Domowitz, Ian, 1993. " Trading Patterns and Prices in the Interbank Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 48(4), pages 1421-43, September.
  3. Foster, F Douglas & Viswanathan, S, 1990. "A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 593-624.
  4. Hasbrouck, Joel, 1995. " One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-99, September.
  5. Curcio, Riccardo, et al, 1997. "Do Technical Trading Rules Generate Profits? Conclusions from the Intra-day Foreign Exchange Market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(4), pages 267-80, October.
  6. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-89, December.
  7. Melvin, Michael & Yin, Xixi, 2000. "Public Information Arrival, Exchange Rate Volatility, and Quote Frequency," Economic Journal, Royal Economic Society, vol. 110(465), pages 644-61, July.
  8. Dacorogna, Michael M. & Muller, Ulrich A. & Nagler, Robert J. & Olsen, Richard B. & Pictet, Olivier V., 1993. "A geographical model for the daily and weekly seasonal volatility in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 413-438, August.
  9. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  10. Richard Payne, 1996. "Announcement Effects and Seasonality in the Intra-day Foreign Exchange Market," FMG Discussion Papers dp238, Financial Markets Group.
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