How Mature is the AUD/NZD Market?
29 Pages Posted: 22 Aug 2007
Date Written: August 22, 2007
We use a high frequency data set to examine information flows between the direct AUD/NZD market and the indirect AUD/USD and NZD/USD markets for the Australian dollar/New Zealand dollar cross-rate. Our results show that information flows are dominated by the contemporaneous information flow during the most active part of the trading day and by the lagged flow of information from the indirect to the direct market when trading activity is low. The lagged flow of information from the direct market to the indirect market is never the dominant channel. These results show that the US dollar markets for the Australasian currency pair remain the locus of price discovery and suggest that the direct AUD/NZD market is still relatively immature, despite the recent growth in trading activity. Knowledge of the leading role played by lagged information flows from the indirect market cannot, however, be exploited profitably.
Keywords: foreign exchange markets, price discovery
JEL Classification: G13, G14, G15
Suggested Citation: Suggested Citation