Price Discovery in Two-Tier Markets

International Journal of Finance and Economics, forthcoming

52 Pages Posted: 13 Jul 2020

See all articles by Geir Hoidal Bjonnes

Geir Hoidal Bjonnes

BI Norwegian Business School

Carol L. Osler

Brandeis University - International Business School

Dagfinn Rime

BI Norwegian Business School

Date Written: January 11, 2020

Abstract

This paper examines the price discovery process in a two-tier market, specifically the foreign exchange market. The goal is to identify the sources of private information and to gain insights into the process through which that information influences the market price. Using a transactions database that includes trading-party identities, we show that sustained post-trade returns rise with bank size, implying that larger banks have an information advantage. The larger banks exploit this information advantage in placing limit orders as well as market orders. We also show that the bank’s private information does not come from their corporate or government customers or from some asset managers. Instead, the bank’s private information appears to come from other asset managers, including hedge funds, and from the bank’s own analysis.

Keywords: Foreign exchange, microstructure, asymmetric information, liquidity premium

JEL Classification: G15, F31, F33

Suggested Citation

Bjonnes, Geir Hoidal and Osler, Carol L. and Rime, Dagfinn, Price Discovery in Two-Tier Markets (January 11, 2020). International Journal of Finance and Economics, forthcoming, Available at SSRN: https://ssrn.com/abstract=3630682

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

Carol L. Osler

Brandeis University - International Business School ( email )

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

Dagfinn Rime (Contact Author)

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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