The Market Microstructure Approach to Foreign Exchange: Looking Back and Looking Forward

55 Pages Posted: 24 May 2013  

Michael R. King

Ivey Business School

Carol L. Osler

Brandeis University - International Business School

Dagfinn Rime

BI Norwegian Business School

Date Written: February 25, 2013

Abstract

Research on foreign exchange market microstructure stresses the importance of order flow, heterogeneity among agents, and private information as crucial determinants of short-run exchange rate dynamics. Microstructure researchers have produced empirically-driven models that fit the data surprisingly well. But FX markets are evolving rapidly in response to new electronic trading technologies. Transparency has risen, trading costs have tumbled, and transaction speed has accelerated as new players have entered the market and existing players have modified their behavior. These changes will have profound effects on exchange rate dynamics. Looking forward, we highlight fundamental yet unanswered questions on the nature of private information, the impact on market liquidity, and the changing process of price discovery. We also outline potential microstructure explanations for long-standing exchange rate puzzles.

Keywords: F31, G12, G15, C42, C82

JEL Classification: Exchange rates, Market microstructure, Order flow, Information, Liquidity

Suggested Citation

King, Michael R. and Osler, Carol L. and Rime, Dagfinn, The Market Microstructure Approach to Foreign Exchange: Looking Back and Looking Forward (February 25, 2013). Journal of International Money and Finance, Forthcoming; Norges Bank Working Paper 2013/12. Available at SSRN: https://ssrn.com/abstract=2268871 or http://dx.doi.org/10.2139/ssrn.2268871

Michael Robert King (Contact Author)

Ivey Business School ( email )

Western University
1255 Western Road
London, Ontario N6G 0N1
Canada
519 661 3084 (Phone)

HOME PAGE: http://www.ivey.uwo.ca/faculty/directory/michael-king/

Carol L. Osler

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States
781-736-4826 (Phone)

Dagfinn Rime

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
+47-46410507 (Phone)

HOME PAGE: http://home.bi.no/dagfinn.rime/

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