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Price discovery in the foreign currency futures and spot market

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  • Joshua V. Rosenberg
  • Leah G. Traub

Abstract

In this paper, we compare price discovery in the foreign exchange futures and spot markets during a period in which the spot market was less transparent but had higher volume than the futures market. We develop a foreign exchange futures order flow measure that is a proxy for the order flow observed by Chicago Mercantile Exchange pit traders. We find that both foreign currency futures and spot order flow contain unique information relevant to exchange rate determination. When we measure contributions to price discovery using the methods of Hasbrouck and of Gonzalo and Granger, we obtain results consistent with our order flow findings. Taken together, our evidence suggests that the amount of information contained in currency futures prices is much greater than one would expect based on relative market size.

Suggested Citation

  • Joshua V. Rosenberg & Leah G. Traub, 2006. "Price discovery in the foreign currency futures and spot market," Staff Reports 262, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:262
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    Cited by:

    1. Dungey, Mardi & Hvozdyk, Lyudmyla, 2012. "Cojumping: Evidence from the US Treasury bond and futures markets," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1563-1575.
    2. Ankita Srivastava, 2017. "A review on pricing of currency futures in Indian foreign exchange market," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 13(2), pages 182-189.
    3. Kalok Chan & Yiuman Tse & Michael Williams, 2011. "The Relationship between Commodity Prices and Currency Exchange Rates: Evidence from the Futures Markets," NBER Chapters,in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 47-71 National Bureau of Economic Research, Inc.

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    Keywords

    Foreign exchange futures ; Futures market ; Foreign exchange rates ; Foreign exchange;

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