A Puzzle of Microstructure Market Maker Models

January 1, 2004

Preview Citation

Format: Chicago

Rafael Romeu. A Puzzle of Microstructure Market Maker Models, (USA: International Monetary Fund, 2004) accessed September 27, 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

This study addresses the empirical viability of microstructure models of dealer price setting. New evidence is presented rejecting these models' specifications of how information asymmetry and inventory accumulation affect dealer pricing. This rejection is consistent with those of other dealer-level empirical studies. This study suggests a new modeling option may be to reconsider optimal price setting while relaxing assumptions that specify incoming orders as the only component through which dealer inventories evolve. This approach is consistent with inventory evolution data and with general equilibrium models' assumptions about currency markets.

Subject: Currencies, Currency markets, Exchange rate modelling, Exchange rates, Purchasing power parity

Keywords: Dealer's inventory, DM dealer, Microstructure model, Order flow coefficient, Price setting, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/006
Stock No:

WPIEA0062004
ISBN:

9781451842326
ISSN:

1018-5941

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