Overnight Price Discovery and the Internationalization of a Currency: The Case of the Korean Won

Abstract

This paper proposes a measure for the level of internationalization of a currency. It is based on the relative share of price discovery, termed the information share, in overnight offshore markets. I show that the overnight offshore markets play an increasingly important role in determining the KRW/USD exchange rate. The information share of the overnight offshore markets has increased from less than 10% in 1999-2000 to above 50% in 2011-2012. The variations in the overnight information share are consistent with variations in overnight market efficiency and investor learning.

Keywords: currency internationalization, price discovery, information share, offshore markets

JEL Classification: F31, F36, G15