{
  "title": "An Intraday Pricing Model of Foreign Exchange Markets",
  "publication": "IMF Working Papers, June 1, 2003",
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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.",
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    {
      "heading": "Summary",
      "content": "- Market makers learn about asset values as they set intraday prices and absorb portfolio flows.\n- Absorbing these flows causes inventory imbalances.\n- Previous work argues market makers change prices to manage incoming flows and offset inventory imbalances.\n- This study argues market makers have multiple instruments to manage inventory imbalances and learn about evolving asset values.\n- Market makers smooth inventory levels and update prior information about assets using multiple instruments.\n- By ignoring other instruments, previous studies have:\n  - ignored the information these instruments provide, and\n  - overemphasized the role of price changes in inventory management.\n- The model presented provides new estimates of:\n  - asymmetric information and inventory effects,\n  - the price impact of each instrument,\n  - the cost of liquidity, and\n  - the impact of an intervention on these costs."
    },
    {
      "heading": "Key findings and estimates",
      "content": "- The paper provides new estimates of asymmetric information effects.\n- The paper provides new estimates of inventory effects.\n- The paper quantifies the price impact of each instrument used by market makers.\n- The paper quantifies the cost of liquidity.\n- The paper quantifies the impact of an intervention on liquidity costs."
    },
    {
      "heading": "Policy relevance and implications",
      "content": "- Understanding multiple instruments used by market makers alters assessment of how prices respond to order flow.\n- Recognizing additional instruments changes estimates of information content in traded prices and the measured cost of liquidity.\n- Evaluations of interventions should account for their impact on multiple instruments and resulting liquidity costs.\n\n---\n\n Content in this bundle\n\n- wp03115\n  - wp03115 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp03115 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/an-intraday-pricing-model-of-foreign-exchange-markets-16529"
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    "[Markdown version](/en/publications/wp/issues/2016/12/30/an-intraday-pricing-model-of-foreign-exchange-markets-16529/index.md)",
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    "Authors: Rafael Romeu",
    "Published: June 1, 2003",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451853889.001",
    "Market makers learn about asset values as they set intraday prices and absorb portfolio flows.",
    "Absorbing these flows causes inventory imbalances.",
    "Previous work argues market makers change prices to manage incoming flows and offset inventory imbalances.",
    "This study argues market makers have multiple instruments to manage inventory imbalances and learn about evolving asset values.",
    "Market makers smooth inventory levels and update prior information about assets using multiple instruments.",
    "By ignoring other instruments, previous studies have:",
    "The model presented provides new estimates of:",
    "The paper provides new estimates of asymmetric information effects.",
    "The paper provides new estimates of inventory effects.",
    "The paper quantifies the price impact of each instrument used by market makers.",
    "The paper quantifies the cost of liquidity.",
    "The paper quantifies the impact of an intervention on liquidity costs.",
    "Understanding multiple instruments used by market makers alters assessment of how prices respond to order flow.",
    "Recognizing additional instruments changes estimates of information content in traded prices and the measured cost of liquidity.",
    "Evaluations of interventions should account for their impact on multiple instruments and resulting liquidity costs.",
    "**_wp03115**"
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