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Pricing errors and the geography of trade in the foreign exchange market

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  • Piccotti, Louis R.

Abstract

Pricing errors in exchange rates are largest during Asian trading hours and decrease until European–New York overlapping trading hours at which point the cycle begins again. Substantial heterogeneity exists in this pattern across exchange rates. Currencies have smaller pricing errors during their home trading hours, which can be explained by traders facing both lower information-unrelated costs and lower information-related costs during a currency׳s home trading hours. Using methods that are able to unambiguously identify the relative importance of information-related and information-unrelated costs for pricing errors, information-unrelated costs are of first-order importance while information-related costs are of second-order importance.

Suggested Citation

  • Piccotti, Louis R., 2016. "Pricing errors and the geography of trade in the foreign exchange market," Journal of Financial Markets, Elsevier, vol. 28(C), pages 46-69.
  • Handle: RePEc:eee:finmar:v:28:y:2016:i:c:p:46-69
    DOI: 10.1016/j.finmar.2015.08.003
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    1. repec:eee:jbfina:v:87:y:2018:i:c:p:49-67 is not listed on IDEAS
    2. repec:eee:jimfin:v:79:y:2017:i:c:p:232-254 is not listed on IDEAS

    More about this item

    Keywords

    Foreign exchange market microstructure; Geography of trade; Market efficiency;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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