Topic
Foreign exchange market
About: Foreign exchange market is a research topic. Over the lifetime, 6661 publications have been published within this topic receiving 153384 citations. The topic is also known as: forex & FX.
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TL;DR: In this article, a simple model of the foreign exchange market is exactly a lattice gauge theory, where exchange rates are the exponentials of gauge potentials defined on spatial links while interest rates are related to gauge potential on temporal links.
Abstract: A simple model of the foreign exchange market is exactly a lattice gauge theory. Exchange rates are the exponentials of gauge potentials defined on spatial links while interest rates are related to gauge potentials on temporal links. Arbitrage opportunities are given by nonzero values of the gauge-invariant field tensor or curvature defined on closed loops. Arbitrage opportunities involving cross-rates at one time are “magnetic fields,” while arbitrage opportunities involving future contracts are “electric fields.”
38 citations
01 Jan 2007
TL;DR: In this article, the authors provide evidence for Evans and Lyons' (2005b) model of an information aggregation process in FX markets using a German bank's end-user order flow from 2002 to 2003.
Abstract: In this paper we provide evidence for Evans and Lyons' (2005b) model of an information aggregation process in FX markets using a German bank's end-user order flow from 2002 to 2003. Though customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the widespread optimism in the market microstructure literature that customer order flow is the high-powered source of information easily exploitable for short-run speculation. Moreover, commercial customers' order flow produces negative coefficients in contemporaneous return regressions, stressing their role as liquidity providers.
38 citations
Posted Content•
TL;DR: In this article, the authors examined the challenges posed by the exchange rate in recent years in the context of inflation targeting and found that emerging market economies, being more exposed to the influence of the currency exchange rate, are likely to accord the currency a bigger role in policy assessment and decision-making.
Abstract: This overview paper examines two main issues. The first is why the exchange rate matters, especially for emerging market economies. The second is under what circumstances and how countries have dealt with the challenges posed by the exchange rate in recent years in the context of inflation targeting. We find that emerging market economies, being more exposed to the influence of the exchange rate, are likely to accord the exchange rate a bigger role in policy assessment and decision-making. However, even with the greater emphasis on the exchange rate, the emerging market economies under review have not acted in contradiction to their announced inflation targets. Furthermore, recent experience shows that having to keep an eye on the exchange rate is also a fact of life in industrial economies, inflation targeting or not.
38 citations
TL;DR: In this article, an error-correction based trading model is implemented to find evidence of cointegration in currency markets using Johansen's multivariate procedure on London daily closing rates for the six major currencies (in dollar terms).
38 citations
TL;DR: In this article, the authors econometrically estimate determinants of the shares of major currencies in the reserve holdings of the world's central banks and forecast the Euro to surpass the dollar as the leading international reserve currency by 2022.
Abstract: Might the dollar eventually follow the precedent of the pound and cede its status as leading international reserve currency? Unlike the last time this question was prominently discussed, ten years ago, there now exists a credible competitor: the euro. This paper econometrically estimates determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, inflation rate (or lagged depreciation trend), exchange rate variability, and size of the relevant home financial center (as measured by the turnover in its foreign exchange market). We have not found that net international debt position is an important determinant. Network externality theories would predict a tipping phenomenon. Indeed we find that the relationship between currency shares and their determinants is nonlinear (which we try to capture with a logistic function, or else with a dummy “leader” variable for the largest country). But changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around 0.9). The advent of the euro interrupts the continuity of the historical data set. So we estimate parameters on pre-1999 data, and then use them to forecast the EMU era. The equation correctly predicts a (small) narrowing in the gap between the dollar and euro over the period 1999-2004. Whether the euro might in the future rival or surpass the dollar as the world’s leading international reserve currency appears to depend on two things: (1) do enough other EU members join euroland so that it becomes larger than the US economy, and (2) does US macroeconomic policy eventually undermine confidence in the value of the dollar, in the form of inflation and depreciation. What we learn about functional form and parameter values helps us forecast, contingent on these two developments, how quickly the euro might rise to challenge the dollar. Under two important scenarios – the remaining EU members, including the UK, join EMU by 2020 or else the recent depreciation trend of the dollar persists into the future – the euro may surpass the dollar as leading international reserve currency by 2022.
38 citations