An Over‐The‐Counter Approach to the Forex Market

47 Pages Posted: 22 May 2020

Date Written: May 2018

Abstract

The foreign exchange (FOREX) market is an over‐the‐counter market characterized by intermediation and significant bid–ask spreads. However, most of the existing international macroeconomics literature models the FOREX as a standard Walrasian market. This article constructs a dynamic general equilibrium model of intermediation in the FOREX market. We use our framework to compute standard measures of FOREX liquidity, such as bid–ask spreads and trade volume, and study how they are affected by macroeconomic fundamentals and market microstructure. We also study how FOREX market microstructure affects the volume of international trade and, consequently, welfare. Our empirical exercise offers support to the models' main predictions.

Suggested Citation

Geromichalos, Athanasios and Jung, Kuk Mo, An Over‐The‐Counter Approach to the Forex Market (May 2018). International Economic Review, Vol. 59, Issue 2, pp. 859-905, 2018, Available at SSRN: https://ssrn.com/abstract=3602063 or http://dx.doi.org/10.1111/iere.12290

Athanasios Geromichalos (Contact Author)

University of California, Davis ( email )

Kuk Mo Jung

Henan University ( email )

85 Minglun St. Shunhe
Kaifeng, Henan 475001
China

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