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How much you know matters: A note on the exchange rate disconnect puzzle

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  • Onur, Esen

Abstract

This paper offers a dynamic model of the foreign exchange market where some investors in the market are more informed than others. By adjusting the proportion of informed investors in the market, it is shown that the disconnect between macroeconomic variables and the exchange rate is sensitive to the amount of asymmetric information in the market. A surprising fi�nding is that this disconnect is bigger when the proportion of informed investors in the market is smaller.

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File URL: http://mpra.ub.uni-muenchen.de/32772/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32772.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:32772

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Keywords: Market microstructure; Foreign exchange market; Asymmetric information;

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  1. Eric van Wincoop & Philippe Bacchetta, 2004. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," Econometric Society 2004 North American Winter Meetings 628, Econometric Society.
  2. Martin D. D. Evans & Dagfinn Rime, 2011. "Micro approaches to foreign exchange determination," Working Paper 2011/05, Norges Bank.
  3. Flood, Robert P & Rose, Andrew K, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," CEPR Discussion Papers 838, C.E.P.R. Discussion Papers.
  4. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Working Paper 2004/13, Norges Bank.
  5. Esen Onur, 2008. "The role of asymmetric information among investors in the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 368-385.
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