ASYMMETRIC INFORMATION AND THE CROSS-SECTION OF CURRENCY SPREADS
ABSTRACT This paper shows that the spreads charged by currency dealers vary inversely with deal size and that they are wider for importers and exporters than for asset managers and other dealers. This pattern is the opposite of that predicted by standard models of market making under asymmetric information, given the information structure of currency markets. The paper suggests that private information gives certain customers market power relative to their dealers. Symmetrically, it suggests that dealers strategically quote narrower spreads to privately informed customers to increase their access to information. Finally, the paper suggests that dealers primarily seek information about transitory market developments rather than fundamentals.
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ABSTRACT: This paper investigates the effect of trade size on security prices. We show that trade size introduces an adverse selection problem into security trading because, given that they wish to trade, informed traders perfer to trade larger amounts at any given price. As a result, market makers' pricing strategies must also depend on trade size, with large trades being made at less favorable prices. Our model provides one explanation for the price effect of block trades and demonstrates that both the size and the sequence of trades matter in determining the price-trade size relationship.Journal of Financial Economics 09/1987; 19(1):69–90. DOI:10.1016/0304-405X(87)90029-8 · 3.72 Impact Factor
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ABSTRACT: The paper examines the optimal behavior of a single dealer who is faced with a stochastic demand to trade (modeled by a continuous time Poisson jump process) and facing return risk on his stock and on the rest of his portfolio (modeled by diffusion processes). Using stochastic dynamic programming, we derive the optimal bid and ask prices that maximize the dealer's expected utility of terminal wealth as a function of the state in which he finds himself. The relationship of the bid and ask prices to inventory of the dealer, instantaneous variance of return, stochastic arrival of transactions and other variables is examined.Journal of Financial Economics 02/1981; 9(1):47-73. DOI:10.1016/0304-405X(81)90020-9 · 3.72 Impact Factor
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ABSTRACT: We report findings from a survey of United States foreign exchange traders. Our results indicate that: (i) in recent years electronically-brokered transactions have risen substantially, mostly at the expense of traditional brokers; (ii) the market norm is an important det e rminant of interbank bid-ask spread and the most widely-cited reason for deviating from the conventional bid-ask spread is a thin/hectic market; (iii) half or more of market respondents believe that large players dominate in the dollar-pound and dollar-Sw i ss franc markets; (iv) technical trading best characterizes about 30% of traders, with this proportion rising from five years ago; (v) news about macroeconomic variables is rapidly incorporated into exchange rates; (vi) the importance of individual macroe c onomic variables shifts over time, although interest rates always appear to be important; (vii) economic fundamentals are perceived to be more important at longer horizons, while short-run deviations from the fundamentals are attributed to excess speculat i on and institutional customer/hedge fund manipulation; (viii) speculation is generally viewed positively, as enhancing market efficiency and liquidity, even though it exacerbates volatility; (ix) central bank intervention does not appear to have substanti a l effect, although there is general agreement that it increases volatility, and finally; (x) traders do not view purchasing power parity as a useful concept, even though a significant proportion (40%) believe that it affects exchange rates at horizons of over six months.Journal of International Money and Finance 02/2000; DOI:10.1016/S0261-5606(01)00002-X · 1.02 Impact Factor