Price-setting in the foreign exchange swap market: Evidence from order flow

Using transaction level data from the inter-dealer market, we find that the price impact of one standard deviation change in FX swap order flow has increased from less than one basis point prior to 2008 to about five basis points after 2008. However, the increase in price impact is confined to perio...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial economics 2022-10, Vol.146 (1), p.119-142
Main Authors: Syrstad, Olav, Viswanath-Natraj, Ganesh
Format: Article
Language:English
Subjects:
Currency swaps
Dollar funding
Exchange rates
Interest rate parity
Order flow
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Using transaction level data from the inter-dealer market, we find that the price impact of one standard deviation change in FX swap order flow has increased from less than one basis point prior to 2008 to about five basis points after 2008. However, the increase in price impact is confined to periods of elevated dispersion in funding costs and over quarterends. Central bank swap lines reduce the order flow into USD, subsequently affecting the FX forward rate. In contrast, over quarter-ends and after monetary policy announcements we observe that dealers immediately adjust prices to curb order flow.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2022.07.004