Working Paper: CEPR ID: DP2296
Authors: Frank de Jong; Ronald Mahieu; Peter Schotman; Irma van Leeuwen
Abstract: This paper uses Reuters exchange rate data to investigate the contributions to the price discovery process by individual banks in the foreign exchange market. We propose multivariate time series models as well as models in tick time to study the dynamic relations between the quotes of individual banks. We investigate the hypothesis that German banks are price leaders in the deutschmark/dollar market. Our empirical results suggest an important but not exclusive role for German banks in the price discovery process. There is also a group of banks, German and non-German, that lags behind the market and does not contribute to the price discovery process. We do not find evidence for stronger price leadership of Deutsche Bank on days with suspected Bundesbank interventions in the foreign exchange market.
Keywords: exchange rates; moment estimators; high frequency data; microstructure
JEL Codes: C32; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large banks have an information advantage (G21) | superior information influences quotes (D83) |
| superior information influences quotes (D83) | quotes issued by banks (G21) |
| German banks play a significant role in price discovery (E58) | price leadership (L11) |
| Bundesbank interventions have no effect on price leadership (E58) | price leadership during interventions (L11) |