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| Author: | Chakrabarti, R. |
| Title: | Just another day in the inter-bank foreign exchange market |
| Journal: | Journal of Financial Economics
2000 : APR, VOL. 56:1, p. 29-64 |
| Index terms: | Stock markets Foreign exchange Models |
| Freeterms: | Microstructure |
| Language: | eng |
| Abstract: | This paper develops a theory of bid-ask quotes provided by foreign exchange dealers in the inter-bank market based on their beliefs and their inventory positions. There is built an agent-based model of the inter-dealer market where dealers learn in a Bayesian manner from quotes from other dealers. Using simulations, it is found that the resulting intra-day spreads and between-quote returns largely conform to the empirically observed intra-day U-shaped pattern. This paper also studies the factors that determine this U-shape. |
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