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An Intraday Pricing Model of Foreign Exchange Markets
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Author/Editor: |
Romeu, Rafael |
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June 1, 2003 |
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Electronic Access: |
Free Full Text (PDF file size is 686KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
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Summary: Market makers learn about asset values as they set intraday prices and absorb portfolio flows. Absorbing these flows causes inventory imbalances. Previous work has argued that market makers change prices to manage incoming flows and offset inventory imbalances. This study argues that they have multiple instruments, or ways to manage inventory imbalances and learn about evolving asset values. Hence, they smooth inventory levels and update prior information about assets using multiple instruments. In ignoring other instruments, previous studies have ignored the information that these provide and overemphasize the role of price changes in inventory management. The model presented here provides new estimates of asymmetric information and inventory effects, the price impact of each instrument, the cost of liquidity, and the impact of an intervention on these costs.
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Series: |
Working Paper No. 03/115 |
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Subject(s): |
Pricing policy | Foreign exchange | Markets | Liquidity | Economic models |
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Author's keyword(s): |
Foreign Exchange | Microstructure | International Macroeconomics |
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Published: |
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June 1, 2003 |
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ISBN/ISSN: |
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1934-7073 |
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Format: |
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Paper |
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Stock No: |
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WPIEA1152003 |
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Pages: |
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35 |
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Price: |
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US$15.00
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