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The forex fixing reform and its impact on cost and risk of forex trading banks

Author

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  • Yamada, Masahiro
  • Ito, Takatoshi

Abstract

This paper quantitatively evaluates the cost and risk of banks trading at the Forex London fixing, and examines the impact of the reform of February 2015. Based on the model calibration, we find that (1) the widening of the fixing time window, a main reform agenda, did not reduce the cost for banks but increased the risk of using pre-hedge; (2) the path of the actual trading volume pattern after the reform is consistent with theoretical predictions in a case of not being able to influence the fixing price.

Suggested Citation

  • Yamada, Masahiro & Ito, Takatoshi, 2017. "The forex fixing reform and its impact on cost and risk of forex trading banks," Finance Research Letters, Elsevier, vol. 21(C), pages 157-162.
    • Handle: RePEc:eee:finlet:v:21:y:2017:i:c:p:157-162
    DOI: 10.1016/j.frl.2016.12.004
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    References listed on IDEAS

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    1. Martin Evans, 2014. "Forex Trading and the WMR Fix," Working Papers gueconwpa~14-14-03, Georgetown University, Department of Economics.
    2. Melvin, Michael & Prins, John, 2015. "Equity hedging and exchange rates at the London 4p.m. fix," Journal of Financial Markets, Elsevier, vol. 22(C), pages 50-72.
    3. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    4. Takatoshi Ito & Masahiro Yamada, 2015. "Was the Forex Fixing Fixed?," NBER Working Papers 21518, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Moeeni , Shahram & Tayebi , Komeil, 2018. "Is It Necessary to Restrict Forex Financial Trading? A Modified Model," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 13(1), pages 63-80, January.
    2. Evans, Martin D.D., 2018. "Forex trading and the WMR Fix," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 233-247.
    3. Melvin, Michael & Pan, Wenqiang & Wikstrom, Petra, 2020. "Retaining alpha: The effect of trade size and rebalancing frequency on FX strategy returns," Journal of Financial Markets, Elsevier, vol. 51(C).
    4. Martin Evans, 2014. "Forex Trading and the WMR Fix," Working Papers gueconwpa~14-14-03, Georgetown University, Department of Economics.
    5. Martinez, Valeria & Tse, Yiuman, 2019. "The impact of tick-size reductions in foreign currency futures markets," Finance Research Letters, Elsevier, vol. 28(C), pages 32-38.

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    More about this item

    Keywords

    Foreign exchange markets; Fixing;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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