Just Another Day in the Inter-Bank Foreign Exchange Market

Posted: 16 Mar 2001

Abstract

In this paper, I develop a theory of bid-ask quotes provided by foreign exchange dealers in the inter-bank market based on their beliefs and their inventory positions. I then build an agent-based model of the inter-dealer market where dealers learn in a Bayesian manner from quotes from other dealers. Using simulations, I find that the resulting intra-day spreads and between-quote returns largely conform to the empirically observed intra-day U-shaped pattern - a feature that has not been satisfactorily explained in the literature. I also study the factors that determine this U-shape.

Keywords: Agent based model, foreign exchange, microstructure

JEL Classification: D83, F31

Suggested Citation

Chakrabarti, Rajesh, Just Another Day in the Inter-Bank Foreign Exchange Market. Journal of Financial Economics, Vol. 56, No. 1, April 2000, Available at SSRN: https://ssrn.com/abstract=251498

Rajesh Chakrabarti (Contact Author)

O. P. Jindal Global University ( email )

Sonepat Narela road
Sonepat
Sonepat, Haryana 131001
India

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