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FX Trading and Exchange Rate Dynamics

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  • Martin D. D. Evans

Abstract

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.

Suggested Citation

  • Martin D. D. Evans, 2002. "FX Trading and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 57(6), pages 2405-2447, December.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:6:p:2405-2447
    DOI: 10.1111/1540-6261.00501
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    References listed on IDEAS

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