IDEAS home Printed from https://ideas.repec.org/p/geo/guwopa/gueconwpa~05-05-20.html
   My bibliography  Save this paper

Foreign Exchange Market Microstructure

Author

Abstract

This paper provides an overview of the recent literature on Foreign Exchange Market Microstructure. Its aim is not to survey the literature, but rather to provide an introductory tour to the main theoretical ideas and empirical results. The central theoretical idea is that trading is an integral part of the process through which information relevant to the pricing of foreign currency becomes embedded in spot rates. Micro-based models study this information aggregation process and produce a rich set of empirical predictions that find strong support in the data. In particular, micro-based models can account for a large proportion of the daily variation in spot rates. They also supply a rationale for the apparent disconnect between spot rates and fundamentals. In terms of forecasting, micro-based models provide out-of-sample forecasting power for spot rates that is an order of magnitude above that usually found in exchange-rate models.

Suggested Citation

  • Martin D. D. Evans (Georgetown University), 2005. "Foreign Exchange Market Microstructure," Working Papers gueconwpa~05-05-20, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~05-05-20
    as

    Download full text from publisher

    File URL: http://www8.georgetown.edu/departments/economics/pdf/520.pdf
    File Function: Full text
    Download Restriction: None

    References listed on IDEAS

    as
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
    2. repec:wsi:wschap:9789813148543_0011 is not listed on IDEAS
    3. Kenneth A. Froot & Tarun Ramadorai, 2005. "Currency Returns, Intrinsic Value, and Institutional-Investor Flows," Journal of Finance, American Finance Association, vol. 60(3), pages 1535-1566, June.
    4. Charles Engel & Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
    5. Martin D.D. Evans & Richard K. Lyons, 2004. "A New Micro Model of Exchange Rate Dynamics," NBER Working Papers 10379, National Bureau of Economic Research, Inc.
    6. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," American Economic Review, American Economic Association, vol. 93(1), pages 38-62, March.
    7. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
    8. repec:wsi:wschap:9789813148543_0012 is not listed on IDEAS
    9. repec:wsi:qjfxxx:v:02:y:2012:i:04:n:s2010139212500188 is not listed on IDEAS
    10. Martin D. D. Evans & Richard K. Lyons, 2017. "Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 11, pages 457-475 World Scientific Publishing Co. Pte. Ltd..
    11. Martin D. D. Evans & Richard K. Lyons, 2017. "Informational Integration and FX Trading," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 7, pages 291-324 World Scientific Publishing Co. Pte. Ltd..
    12. Love, Ryan & Payne, Richard, 2008. "Macroeconomic News, Order Flows, and Exchange Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(02), pages 467-488, June.
    13. Martin D. D. Evans & Richard K. Lyons, 2017. "Do Currency Markets Absorb News Quickly?," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 12, pages 477-505 World Scientific Publishing Co. Pte. Ltd..
    14. Martin D. D. Evans & Richard K. Lyons, 2017. "How is Macro News Transmitted to Exchange Rates?," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 14, pages 547-596 World Scientific Publishing Co. Pte. Ltd..
    15. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
    16. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    17. repec:wsi:wschap:9789813148543_0016 is not listed on IDEAS
    18. Martin D. D. Evans & Richard K. Lyons, 2017. "Exchange Rate Fundamentals and Order Flow," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 16, pages 645-724 World Scientific Publishing Co. Pte. Ltd..
    19. Osler, Carol L., 2005. "Stop-loss orders and price cascades in currency markets," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 219-241, March.
    20. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dewachter, Hans & Erdemlioglu, Deniz & Gnabo, Jean-Yves & Lecourt, Christelle, 2014. "The intra-day impact of communication on euro-dollar volatility and jumps," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 131-154.
    2. 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.
    3. Laura Andrade-Pardo & Oscar Valencia-Arana & Diego Vásquez-Escobar & Mauricio Villamizar-Villegas, 2016. "Uncovering the portfolio balance channel with the use of sovereign credit ratings," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 34(81), pages 191-205, November.

    More about this item

    Keywords

    Exchange Rates; Microstructure; Information Aggregation; FX Trading.;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:geo:guwopa:gueconwpa~05-05-20. 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: (Marcia Suss). General contact details of provider: http://econ.georgetown.edu/ .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.