Auction-Based Tests of Inventory Control and Private Information in a Centralized Interdealer FX Market

Abstract

This study investigates the impact of inventory control and private information on trading prices and volumes in a centralized interdealer foreign exchange (FX) market. We utilize exogenous variation in U.S. Dollar inventories and information induced by daily FX auctions conducted by a central bank. We analyze settlement data from the spot market during the trading day before and after each auction and compare the behavior of dealers exposed to differential inventory and information shocks at the auction. The findings reveal that dealers with reduced inventories increase their net purchases of USD and pay higher buying prices post-auction.

Keywords: Microestructure, Foreign Exchange, Private Information, Inventory Control, Auctions