Dealer Heterogeneity and Exchange Rates

155 Pages Posted: 22 Aug 2018 Last revised: 11 Feb 2023

See all articles by Florent Gallien

Florent Gallien

Swissquote Bank

Sergei Glebkin

INSEAD

Serge Kassibrakis

Swissquote Bank

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Alberto Teguia

Rice University, Jesse H. Jones Graduate School of Business, Students

Date Written: July 15, 2018

Abstract

We show, both theoretically and empirically, that several statistics of dealer heterogeneity affect prices and liquidity in the foreign exchange (FX) market. A higher cross-sectional covariance between dealers’ risk aversions and inventories is associated with higher FX returns. Although unobservable, this statistic can be proxied by the cross-sectional covariance between dealer-to-customer (D2C) prices and bid-ask spreads. A higher cross sectional dispersion of dealer risk aversions is associated with higher liquidity in the dealer to-dealer market and can be proxied by the crosssectional dispersion of D2C spreads. These predictions are confirmed empirically using proprietary data on the largest FX dealers’ D2C quotes.

Keywords: Liquidity, Foreign Exchange, OTC markets, Price Impact, Market Power

JEL Classification: F31, G12, G14, G21

Suggested Citation

Gallien, Florent and Glebkin, Sergei and Kassibrakis, Serge and Malamud, Semyon and Teguia, Alberto, Dealer Heterogeneity and Exchange Rates (July 15, 2018). Swiss Finance Institute Research Paper No. 18-56, Available at SSRN: https://ssrn.com/abstract=3234406 or http://dx.doi.org/10.2139/ssrn.3234406

Florent Gallien

Swissquote Bank ( email )

Ch. de la Crétaux 33
Gland, Vaud 1196
Switzerland

Sergei Glebkin

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Serge Kassibrakis

Swissquote Bank ( email )

Ch. de la Crétaux 33
Gland, Vaud 1196
Switzerland

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Alberto Teguia

Rice University, Jesse H. Jones Graduate School of Business, Students ( email )

Houston, TX
United States

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