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Order flow in the South: Anatomy of the Brazilian FX market

  • Wu, Thomas
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    This paper analyses one of the main pillars of Brazil's newly found economic resilience: a maturing FX market providing support to its managed floating exchange rate regime. I develop a microstructure model suitable to describe the Brazilian FX market, an emerging economy frequently subjected to sudden stops in capital flows. The model introduces two major changes relative to previous microstructure models. First, dealers may decide to hold overnight positions in the FX market if they find it profitable to do so. Second, customers’ demand for foreign exchange is a function of macroeconomic fundamentals, including contemporaneous feedback from exchange rate movements. The main predictions of the model are supported by a unique data set, covering all transactions between dealers and customers from the official Brazilian FX market from July 1, 1999 to June 30, 2003 (a time period in which Brazil suffered two severe external liquidity shocks).

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    Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

    Volume (Year): 23 (2012)
    Issue (Month): 3 ()
    Pages: 310-324

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    Handle: RePEc:eee:ecofin:v:23:y:2012:i:3:p:310-324
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620163

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