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The Microstructure of Foreign Exchange Markets

The foreign exchange market is the largest, fastest-growing financial market in the world. Yet conventional macroeconomic approaches do not explain why people trade foreign exchange. At the same time, they fail to explain the short-run determinants of the exchange rate.

These nine innovative essays use a microstructure approach to analyze the workings of the foreign exchange market, with special emphasis on institutional aspects and the actual behavior of market participants. They examine the volume of transactions, heterogeneity of traders, the time of day and location of trading, the bid-ask spread, and the high level of exchange rate volatility that has puzzled many observers. They also consider the structure of the market, including such issues as nontransparency, asymmetric information, liquidity trading, the use of automated brokers, the relationship between spot and derivative markets, and the importance of systemic risk in the market.

This timely volume will be essential reading for anyone interested in the economics of international finance.

356 pages | 69 line drawings, 62 tables | 6 x 9 | © 1996

National Bureau of Economic Research Conference Report

Economics and Business: Economics--International and Comparative

Table of Contents

Jeffrey A. Frankel, Giampaolo Galli, Alberto Giovannini.
1: Risk and Turnover in the Foreign Exchange Market
Philippe Jorion
Comment: Bernard Dumas
2: Bid-Ask Spreads in Foreign Exchange Markets: Implications for Models
of Asymmetric Information
David A. Hsieh, Allan W. Kleidon.
Comment: Zhaohui Chen
Comment: Antti Suvanto
3: Interdealer Trade and Information Flows in a Decentralized Foreign
Exchange Market
William Perraudin, Paolo Vitale.
Comment: Silverio Foresi
Comment: Alan Kirman
4: One Day in June 1993: A Study of the Working of the Reuters 2000-2
Electronic Foreign Exchange Trading System
Charles Goodhart, Takatoshi Ito, Richard Payne.
Comment: Richard K. Lyons
5: Foreign Exchange Volume: Sound and Fury Signifying Nothing?
Richard K. Lyons
Comment: Mark D. Flood
Comment: Antonio Mello
6: Dynamic Hedging and the Interest Rate Defense
Peter M. Garber, Michael G. Spencer.
Comment: Richard K. Lyons
7: Heterogenous Behavior in Exchange Rate Crises
Fabio C. Bagliano, Andrea Beltratti, Guiseppe Bertola.
Comment: Lorenzo Bini-Smaghi
Comment: Richard K. Lyons
8: Exchange Rate Economics: What’s Wrong with the Conventional Macro
Robert P. Flood, Mark P. Taylor.
Comment: Andrew K. Rose
Comment: Lars E. O. Svensson
9: Is There a Safe Passage to EMU? Evidence on Capital Controls and a
Barry Eichengreen, Andrew K. Rose, Charles Wyplosz.
Comment: Jose Vinals
Author Index
Subject Index

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