IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Price Discovery in Multiple-Dealer Markets: The Case of the Interbank Foreign Exchange Market

  • Karyn L. Williams

    (Drucker Graduate School of Management, Claremont Graduate University)

Registered author(s):

    Price discovery is a principal function of financial markets. Yet, especially for dealership markets, financial economists know little about how prices are determined. In this paper I analyze the process of price discovery in the multiple-dealer, interbank spot market for foreign exchange. I use DM/$ quotes to calculate interbank dealers’ “information shares,” their proportional contributions to the variance of innovations in the implicit, efficient exchange rate. These information shares are used to analyze relationships between price discovery and dealer characteristics. Unlike the U.S. equity markets, where regional exchanges contribute relatively little to price discovery, less-active interbank dealers play a large role, impounding most of the information into quotes. A pooled analysis of dealers’ intraday information shares indicates that the lower the relative bid-ask spread and the greater the number of regional foreign exchange branches, the higher is a dealer’s contribution to price discovery. Dealer nationality, however, does not appear related to price discovery within dealers’ domestic markets.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.claremontmckenna.edu/rdschool/papers/2000-37.pdf
    Download Restriction: no

    Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2000-37.

    as
    in new window

    Length:
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:clm:clmeco:2000-37
    Contact details of provider: Postal: 500 E. 9th Street, Claremont, CA 91711
    Phone: (909) 607-3041
    Fax: (909) 621-8249
    Web page: http://www.claremontmckenna.edu/rdschool/papers/

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    2. de Jong, F.C.J.M. & Nijman, T.E., 1995. "High frequency analysis of lead-lag relationships between financial markets," Discussion Paper 1995-34, Tilburg University, Center for Economic Research.
    3. Kandel, Eugene & Marx, Leslie M., 1997. "Nasdaq market structure and spread patterns," Journal of Financial Economics, Elsevier, vol. 45(1), pages 61-89, July.
    4. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
    5. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    6. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    7. Chowdhry, Bhagwan & Nanda, Vikram, 1991. "Multimarket Trading and Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 483-511.
    8. Stoll, Hans R, 1978. "The Supply of Dealer Services in Securities Markets," Journal of Finance, American Finance Association, vol. 33(4), pages 1133-51, September.
    9. Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, December.
    10. Takatoshi Ito & Richard K. Lyons & Michael T. Melvin, 1998. "Is There Private Information in the FX Market? The Tokyo Experiment," Journal of Finance, American Finance Association, vol. 53(3), pages 1111-1130, 06.
    11. Lyons, Richard K., 1996. "Optimal Transparency in a Dealer Market with an Application to Foreign Exchange," Journal of Financial Intermediation, Elsevier, vol. 5(3), pages 225-254, July.
    12. Nijman, T.E. & de Jong, F.C.J.M., 1997. "High frequency analysis of lead-lag relationships between financial markets," Other publications TiSEM f4f406a0-771a-4af2-9364-6, Tilburg University, School of Economics and Management.
    13. Dutta, Prajit K & Madhavan, Ananth, 1997. " Competition and Collusion in Dealer Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 245-76, March.
    14. Garbade, Kenneth D & Silber, William L, 1979. "Dominant and Satellite Markets: A Study of Dually-Traded Securities," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 455-60, August.
    15. Flood, Mark D., 1994. "Market structure and inefficiency in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 13(2), pages 131-158, April.
    16. Torben G. Andersen & Tim Bollerslev, 1998. "Deutsche Mark-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies," Journal of Finance, American Finance Association, vol. 53(1), pages 219-265, 02.
    17. Gehrig, Thomas, 1996. "Natural oligopoly and customer networks in intermediated markets," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 101-118.
    18. Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, vol. 42(3-4), pages 275-298, May.
    19. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    20. Madrigal, Vicente & Scheinkman, Jose A., 1997. "Price Crashes, Information Aggregation, and Market-Making," Journal of Economic Theory, Elsevier, vol. 75(1), pages 16-63, July.
    21. Madhavan, Ananth, 1995. "Consolidation, Fragmentation, and the Disclosure of Trading Information," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 579-603.
    22. repec:ner:tilbur:urn:nbn:nl:ui:12-74206 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:clm:clmeco:2000-37. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.