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A Market Microstructure Analysis of Foreign Exchange Intervention in Canada

  • Chris D'Souza

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp02-16.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-16.

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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:
Handle: RePEc:bca:bocawp:02-16
Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

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