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Title | A Market Microstructure Analysis of Foreign Exchange Intervention in Canada |
Author(s) | Chris D'Souza |
Type | Working Paper 2002-16 |
Date of publication |
June 2002 |
Language | English |
Abstract |
This paper clarifies the role and the impact of foreign exchange dealers in the relationship between foreign exchange intervention and nominal exchange rates using a unique dataset that disaggregates trades by dealer and by type of trade. The paper tests a number of market microstructure hypotheses. Results suggest that central bank orders and other customer orders are treated similarly by dealers who are engaged in short-run speculative and risk-sharing-motivated interdealer trading. While private payoff-relevant information is contained in trades, speculative interdealer trading is based only on transitory non-payoff-relevant information. A central bank considering intervention must consider both the signal it wishes to convey to the market and the subsequent trading strategies utilized by dealers. |
Bank topic index |
Exchange rates; Financial institutions; Financial markets |
JEL classification |
F31, G14, G21 |
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