FX Trading and Exchange Rate Dynamics

I examine the sources of exchange rate dynamics by focusing on the information structure of FX trading. This structure permits the existence of an equilibrium distribution of transaction prices at a point in time. I develop and estimate a model of the price distribution using data from the Deutsche...

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Bibliographic Details
Published in:The Journal of finance (New York) 2002-12, Vol.57 (6), p.2405-2447
Main Author: Evans, Martin D. D.
Format: Article
Language:English
Subjects:
Business orders
Currency market
Dynamics
Exchange rates
Foreign exchange markets
Foreign exchange rates
Heteroskedasticity
International finance
International trade
Market economy
Market prices
Order flow
Price changes
Price shocks
Statistical variance
Studies
Trade
Volatility
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Summary:I examine the sources of exchange rate dynamics by focusing on the information structure of FX trading. This structure permits the existence of an equilibrium distribution of transaction prices at a point in time. I develop and estimate a model of the price distribution using data from the Deutsche mark/dollar market that produces two striking results: (1) Much of the short-term volatility in exchange rates comes from sampling the heterogeneous trading decisions of dealers in a distribution that, under normal market conditions, changes comparatively slowly; (2) public news is rarely the predominant source of exchange rate movements over any horizon.
ISSN:0022-1082
1540-6261
DOI:10.1111/1540-6261.00501