Advanced Search
MyIDEAS: Login

An Intraday Pricing Model of Foreign Exchange Markets

Contents:

Author Info

  • Rafael Romeu
Registered author(s):

    Abstract

    Market makers learn about asset values as they set intraday prices and absorb portfolio flows. Absorbing these flows causes inventory imbalances. Previous work has argued that market makers change prices to manage incoming flows and offset inventory imbalances. This study argues that they have multiple instruments, or ways to manage inventory imbalances and learn about evolving asset values. Hence, they smooth inventory levels and update prior information about assets using multiple instruments. In ignoring other instruments, previous studies have ignored the information that these provide and overemphasize the role of price changes in inventory management. The model presented here provides new estimates of asymmetric information and inventory effects, the price impact of each instrument, the cost of liquidity, and the impact of an intervention on these costs.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16529
    Download Restriction: no

    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/115.

    as in new window
    Length: 35
    Date of creation: 01 Jun 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/115

    Contact details of provider:
    Postal: International Monetary Fund, Washington, DC USA
    Phone: (202) 623-7000
    Fax: (202) 623-4661
    Email:
    Web page: http://www.imf.org/external/pubind.htm
    More information through EDIRC

    Order Information:
    Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

    Related research

    Keywords: Markets; Liquidity; Economic models;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    2. Madhavan, Ananth & Sofianos, George, 1998. "An empirical analysis of NYSE specialist trading," Journal of Financial Economics, Elsevier, vol. 48(2), pages 189-210, May.
    3. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    4. Evans, Martin D. & Lyons, Richard K., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance, Working Paper Series qt0dh1c16w, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
    5. Takatosh Ito & Richard K. Lyons & Michael T. Melvin, 1997. "Is there private information in the FX market? the Tokyo experiment," Pacific Basin Working Paper Series 97-04, Federal Reserve Bank of San Francisco.
    6. Richard K. Lyons, 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," NBER Working Papers 4471, National Bureau of Economic Research, Inc.
    7. Robert P. Flood & Andrew K. Rose, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," NBER Working Papers 4503, National Bureau of Economic Research, Inc.
    8. H. Henry Cao & Richard K. Lyons & Martin D.D. Evans, 2003. "Inventory Information," NBER Working Papers 9893, National Bureau of Economic Research, Inc.
    9. Kenneth A. Froot & Paul G.J. O'Connell & Mark S. Seasholes, 1998. "The Portfolio Flows of International Investors, I," NBER Working Papers 6687, National Bureau of Economic Research, Inc.
    10. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
    11. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    12. Hans R. Stoll, . "The Supply of Dealer Services in Securities Markets," Rodney L. White Center for Financial Research Working Papers 02-78, Wharton School Rodney L. White Center for Financial Research.
    13. Robert P. Flood & Mark P. Taylor, 1996. "Exchange Rate Economics: What's Wrong with the Conventional Macro Approach?," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 261-302 National Bureau of Economic Research, Inc.
    14. O'Hara, Maureen & Oldfield, George S., 1986. "The Microeconomics of Market Making," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 361-376, December.
    15. Kenneth A. Froot & Tarun Ramadorai, 2001. "The Information Content of International Portfolio Flows," NBER Working Papers 8472, National Bureau of Economic Research, Inc.
    16. Manaster, Steven & Mann, Steven C, 1996. "Life in the Pits: Competitive Market Making and Inventory Control," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 953-75.
    17. Madhavan, A. & Smidt, S., 1991. "A Baysian Model of Intraday Specialist Pricing," Weiss Center Working Papers 2-91, Wharton School - Weiss Center for International Financial Research.
    18. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
    19. Rime,D., 2000. "Private or public information in foreign exchange markets? : an empirical analysis," Memorandum 14/2000, Oslo University, Department of Economics.
    20. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
    21. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
    22. Hasbrouck, Joel, 1988. "Trades, quotes, inventories, and information," Journal of Financial Economics, Elsevier, vol. 22(2), pages 229-252, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Rafael Romeu, 2004. "A Puzzle of Microstructure Market Maker Models," IMF Working Papers 04/6, International Monetary Fund.
    2. Rafael Romeu & Lawrence Ausubel, 2005. "Bidder Participation and Information in Currency Auctions," IMF Working Papers 05/157, International Monetary Fund.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:03/115. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.