Working Paper: NBER ID: w27036
Authors: Masahiro Yamada; Takatoshi Ito
Abstract: We examine whether the forex market quality, measured by the speed of price discovery and liquidity recovery after macro statistics announcements, has improved using the EBS high-frequency data for 20 years. Considering the recent rise of computer-based trading, a popular conjecture is that the market quality has improved. Our empirical analysis, however, suggests that an improving trend is only observed in price discovery. Moreover, two measures are negatively correlated because an increasing number of traders improves liquidity but slows down price discovery. Theoretically, the latter finding implies that “fast” traders have a poor interpretation of how the news will impact prices.
Keywords: Forex market; Price discovery; Liquidity recovery; High-frequency trading; Macro announcements
JEL Codes: E44; F31; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| speed of price discovery (D41) | precision of information held by traders (D83) |
| R-squared measure (C29) | speed of price discovery (D41) |
| number of traders submitting limit orders (C69) | speed of price discovery (D41) |
| number of traders (F10) | liquidity recovery (G33) |
| R-squared measure (C29) | liquidity recovery (G33) |