An Intraday Pricing Model of Foreign Exchange Markets

June 1, 2003

Preview Citation

Format: Chicago

Rafael Romeu. An Intraday Pricing Model of Foreign Exchange Markets, (USA: International Monetary Fund, 2003) accessed November 23, 2024

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

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.

Subject: Asset and liability management, Asset valuation, Brokers and dealers, Currency markets, Expenditure, Financial markets, Foreign exchange, Liquidity, Public investment and public-private partnerships (PPP)

Keywords: Asset valuation, Brokers and dealers, Carrying cost, Currency markets, Dealer price appreciation, Foreign Exchange, International Macroeconomics, Inventory cost, Inventory effect, Liquidity, Microstructure, Order flow, Price change, Price impact, Public investment and public-private partnerships (PPP), WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/115
Stock No:

WPIEA1152003
ISBN:

9781451853889
ISSN:

1018-5941

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