Price Discovery and Liquidity for Competing Exchange Rates

29 Pages Posted: 2 Jan 2019

See all articles by Iñaki Rodríguez-Longarela

Iñaki Rodríguez-Longarela

Stockholm University - Stockholm Business School; UiT-The Arctic University of Norway - School of Business and Economics

Geir Hoidal Bjonnes

BI Norwegian Business School

Date Written: December 16, 2018

Abstract

For many countries, trading on news on their fundamentals mainly occurs via two competing channels, namely, their currency's exchange rate with either the Euro or the US dollar. This paper presents a framework to examine price discovery across these two alternatives. Our empirical implementation suggests that during the early/mid 2000's for the Swiss Franc most price discovery seem to take place via its exchange rate with the Euro whereas the opposite was true for the Japanese Yen. Furthermore, we establish a link of unusual strength between relative liquidity and the daily (and cross-sectional) variation in informational advantage among these two channels. Subsequent analysis finds a plausible mechanism driving this prominent role of liquidity based on a novel measure of staleness.

Keywords: exchange rates, price discovery, currencies, liquidity, bid-ask spread, staleness

JEL Classification: F31, G14, G15

Suggested Citation

Rodríguez Longarela, Iñaki and Bjonnes, Geir Hoidal, Price Discovery and Liquidity for Competing Exchange Rates (December 16, 2018). Available at SSRN: https://ssrn.com/abstract=3302194 or http://dx.doi.org/10.2139/ssrn.3302194

Iñaki Rodríguez Longarela (Contact Author)

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

UiT-The Arctic University of Norway - School of Business and Economics ( email )

Tromsø, 9037
Norway

Geir Hoidal Bjonnes

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0484
Norway
+47 46410502 (Phone)

HOME PAGE: http://www.bi.no/BI/AcademicProfile____37601.aspx?ansattid=/fgl96014

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