A Market Microstructure Analysis of Foreign Exchange Intervention in Canada
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|Length:||74 pages Abstract: This paper clarifies the role and the impact of foreign exchange dealers in the relationship between foreign exchange intervention and nominal exchange rates using a unique dataset that disaggregates trades by dealer and by type of trade. The paper tests a number of market microstructure hypotheses. Results suggest that central bank orders and other customer orders are treated similarly by dealers who are engaged in short-run speculative and risk-sharing-motivated interdealer trading. While private payoff-relevant information is contained in trades, speculative interdealer trading is based only on transitory non-payoff-relevant information. A central bank considering intervention must consider both the signal it wishes to convey to the market and the subsequent trading strategies utilized by dealers.|
|Date of creation:||2002|
|Date of revision:|
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