Price Discovery in Foreign Exchange Markets: A Comparison of Indicative and Actual Transaction Prices
1 Pages Posted: 12 Nov 2008
Date Written: November 11, 2008
In this paper, we compare four months of Reuters EFX high frequency indicative data with D2000-1 inter-dealer transaction data for DEM/USD and GBP/USD. Contrary to previous studies, we find, using various information measures, that the matched tick-by-tick indicative data bear no qualitative difference from the transaction data, and have higher information content. Expanding the system to include order flow, due to its growing importance in exchange rate theory, we find that indicative data has a similar impact on order flow as transaction data. However, order flow has no impact on either price.
Keywords: Exchange rates, Foreign Exchange market microstructure, High frequency data, Order flow, Indicative data
JEL Classification: F31, G15
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