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Price Discovery in Currency Markets

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  • Osler, Carol
  • Mende, Alexander
  • Menkhoff, Lukas

Abstract

This paper makes three contributions to our understanding of the price discovery process in currency markets. First, it provides evidence that this process cannot be the familiar one based on adverse selection and customer spreads, since such spreads are inversely related to a trade's likely information content. Second, the paper suggests three potential sources for the pattern of customer spreads, two of which rely on the information structure of the market. Third, the paper suggests an alternative price discovery process for currencies, centered on inventory management strategies in the interdealer market, and provides preliminary evidence for that process.

Suggested Citation

  • Osler, Carol & Mende, Alexander & Menkhoff, Lukas, 2006. "Price Discovery in Currency Markets," Hannover Economic Papers (HEP) dp-351, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  • Handle: RePEc:han:dpaper:dp-351
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    References listed on IDEAS

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    Keywords

    Bid-ask spread; foreign exchange; asymmetric information; microstructure; price discovery; interdealer; inventory; market order; limit order;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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