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Forex Trading and the WMR Fix

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  • Evans, Martin

Abstract

I examine the behavior of forex prices around the setting of the 4:00 pm WMR Fix. Numerous banks have been fined by regulators for their trading activities around the Fix, but the overall impact of their actions is not known. I first examine trading patterns around the Fix in a microstructure model of competitive trading. I then compare the model with the empirical behavior of forex prices across 21 currencies over a decade. Contrary to the predictions of the model, forex price changes display extraordinary volatility and negative serial correlation around the Fix.

Suggested Citation

  • Evans, Martin, 2017. "Forex Trading and the WMR Fix," MPRA Paper 81583, University Library of Munich, Germany, revised 25 Sep 2017.
  • Handle: RePEc:pra:mprapa:81583
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    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. Bjonnes, Geir Hoidal & Rime, Dagfinn, 2005. "Dealer behavior and trading systems in foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 75(3), pages 571-605, March.
    3. 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, June.
    4. Vitale, Paolo, 2000. "Speculative noise trading and manipulation in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 689-712, October.
    5. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.
    6. Melvin, Michael & Prins, John, 2015. "Equity hedging and exchange rates at the London 4p.m. fix," Journal of Financial Markets, Elsevier, vol. 22(C), pages 50-72.
    7. Vila, Jean-Luc, 1989. "Simple games of market manipulation," Economics Letters, Elsevier, vol. 29(1), pages 21-26.
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    9. Hillion, Pierre & Suominen, Matti, 2004. "The manipulation of closing prices," Journal of Financial Markets, Elsevier, vol. 7(4), pages 351-375, October.
    10. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
    11. Comerton-Forde, Carole & Putnins, Talis J., 2011. "Measuring closing price manipulation," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 135-158, April.
    12. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    13. Cushing, David & Madhavan, Ananth, 2000. "Stock returns and trading at the close," Journal of Financial Markets, Elsevier, vol. 3(1), pages 45-67, February.
    14. Oliver D. Hart, 1977. "On The Profitability of Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 91(4), pages 579-597.
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    Citations

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    Cited by:

    1. Liu, Tao, 2014. "The onshore-offshore interaction of RMB market: a high-frequency analysis," MPRA Paper 63905, University Library of Munich, Germany.
    2. repec:eee:inecon:v:109:y:2017:i:c:p:214-234 is not listed on IDEAS
    3. repec:eee:finlet:v:21:y:2017:i:c:p:157-162 is not listed on IDEAS
    4. repec:eee:jimfin:v:80:y:2018:i:c:p:75-95 is not listed on IDEAS
    5. Takatoshi Ito & Masahiro Yamada, 2016. "Puzzles in the Tokyo Fixing in the Forex Market: Order Imbalances and Bank Pricing," UTokyo Price Project Working Paper Series 069, University of Tokyo, Graduate School of Economics.
    6. Takatoshi Ito & Masahiro Yamada, 2016. "Puzzles in the Forex Tokyo “Fixing”: Order Imbalances and Biased Pricing by Banks," NBER Working Papers 22820, National Bureau of Economic Research, Inc.
    7. Takatoshi Ito & Masahiro Yamada, 2015. "Was the Forex Fixing Fixed?," NBER Working Papers 21518, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Forex Trading; Order Flows; Forex Price Fixes; Microstructure Trading Models;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G1 - Financial Economics - - General Financial Markets

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