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FX Trading and Exchange Rate Dynamics

  • Martin D. D. Evans

    (Department of Economics at Georgetown University and the N.B.E.R.)

I examine the sources of exchange rate dynamics by focusing on the information structure of FX trading. This structure permits the existence of an equilibrium distribution of transaction prices at a point in time. I develop and estimate a model of the price distribution using data from the Deutsche mark/dollar market that prroduces two striking results:(1) Much of the short-term volatility in exchange rates comes from sampling the heterogeneous trading decisions of dealers in a distribution that, under normal market conditions, changes comparatively slowly; (2) public news is rarely the predominant source of exchange rate movements over "any"horizon. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 6 (December)
Pages: 2405-2447

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:6:p:2405-2447
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