Exchange Rate Volatility's Dependence on Different Degrees of Competition under Different Learning Rules. A Market Microstructur Approach.

We assess the phenomenon of excess volatility in intra-day foreign exchange markets using a market microstructure approach. Introducing different degrees of competition in the forex market and applying different learning mechanisms we are able to give a rationale for traders' use of rather simple learning rules: Behaving less rationally turns out to be more profitable, thus preserving rationality in traders' choice. Competition's impact on volatility is ambiguous: Depending on the variance measure applied volatility can be increasing in competition.