Dagfinn Rime

Dagfinn Rime
BI Norwegian Business School | BINBS · Department of Financial Economics

PhD

About

77
Publications
74,281
Reads
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1,804
Citations
Introduction
For private homepage: http://home.bi.no/dagfinn.rime Dagfinn Rime's research interests are on financial market behavior, and in particular the microstructure of foreign exchange markets. His work has been published in leading journals. Dagfinn has held positions both as manager and as policy advisor in Norges Bank, and as adjunct professor at the Norwegian University of Science and Technology (NTNU).
Additional affiliations
October 2014 - present
BI Norwegian Business School
Position
  • Professor (Full)
March 2014 - October 2014
BI Norwegian Business School
Position
  • Professor (Associate)
May 2006 - April 2012
Norwegian University of Science and Technology
Position
  • Teaching financial econometrics
Description
  • Teaching and advising MSc-students
Education
January 1996 - December 2000
BI Norwegian Business School
Field of study
  • Financial economics

Publications

Publications (77)
Research
We investigate the relation between foreign exchange (FX) order flow and the forward bias. We outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time-varying risk premium consistent with that bias. Using ten years of data on FX order flow we find that mo...
Article
We study dealer behavior in the foreign exchange spot market using detailed observations on all the transactions of four interbank dealers. There is strong support for an information effect in incoming trades. The direction of trade is most important, but we also find that the information effect increases with trade size in direct bilateral trades....
Research
Full-text available
Abstract This paper examines why order flows are empirically important drivers of spot exchange rate dynamics. We consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental information about future interest rate differen...
Article
The scapegoat theory of exchange rates (Bacchetta and van Wincoop, 2004 and Bacchetta and van Wincoop, 2013) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as “scapegoats” to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks....
Technical Report
Full-text available
This file provides a bibliography of the literature on the Microstructure of Foreign Exchange Markets. It includes clickable url-or doi-links 1 to most of the published papers, and even to some of the working papers. I will add more annotations over time. The BibTeX database used for this file is available from my homepage. The references are organ...
Article
To understand deviations from covered interest parity (CIP), it is crucial to account for heterogeneity in funding costs across both banks and currency areas. For most market participants, the no-arbitrage relation holds fairly well when implemented using marginal funding costs and risk-free investment instruments. However, a few high-rated banks d...
Article
Full-text available
This paper examines the price discovery process in a two‐tier market, specifically the foreign‐exchange market. The goal is to identify the sources of private information and to gain insights into the process through which that information influences the market price. Using a transactions database that includes trading‐party identities, we show tha...
Article
Full-text available
Does the central bank practice of publishing interest rate projections (IRPs) improve how market participants map new information into future interest rates? Using high-frequency data on forward rate agreements (FRAs) we compute market forecast errors; differences between expected future interest rates and ex-post realizations. We assess their chan...
Chapter
Full-text available
This article presents an overview of research on the Microstructure of Foreign Exchange Markets. We begin by summarizing the institutional features of FX trading and describe how they have evolved since the 1980s. We then explain how these features are represented in microstructure models of FX trading. Next, we describe the links between microstru...
Preprint
Full-text available
We examine the design and effectiveness of the 4pm Fix, the most important benchmark in FX markets, using a unique dataset of trader identified orderbook data from an inter-dealer venue. We propose and examine new measures of benchmark quality and examine changes to market liquidity and trader behaviour. Benchmark quality, measured as price efficie...
Article
We investigate the relation between foreign exchange (FX) order flow and the forward bias. We outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time-varying risk premium consistent with that bias. Using 10 years of data on FX order flow, we find that mo...
Article
This paper examines why order flows are empirically important drivers of spot exchange rate dynamics. We consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental information about future interest rate differentials, ri...
Article
We built the largest dataset of high-frequency exchange rates so far. Our sample covers the spot prices and order flows of 19 currency pairs over the last 15 years measured on Reuters and EBS at the thirty-second frequency. We show that common, price-based factors describe exchange rate dynamics at high frequencies at least as well as the quantity-...
Article
Using the longest data set on foreign exchange (FX) order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for 11 Asian...
Article
What is the role of “large players” (e.g., hedge funds) in speculative attacks? Recent work suggests that large players move early to induce smaller agents to attack. However, many observers argue that large players move late in order to benefit from interest-rate differentials. We propose a model in which large players can do both. Using data on c...
Article
The poor performance of macroeconomic exchange rate models in and out-of-sample is well documented in literature. One reason for this result is the impact of ‘scapegoat’ effects: that is, participants attach different weights to different macro fundamentals in different periods. On the other hand, microstructure approaches to exchange rate determin...
Article
Full-text available
Trading in the FX market reached an all-time high of $5.3 trillion per day in April 2013, a 35% increase relative to 2010. Non-dealer financial institutions, including smaller banks, institutional investors and hedge funds, have grown into the largest and most active counterparty segment. The once clear-cut divide between inter-dealer and customer...
Article
Full-text available
Research on foreign exchange market microstructure stresses the importance of order flow, heterogeneity among agents, and private information as crucial determinants of short-run exchange rate dynamics. Microstructure researchers have produced empirically-driven models that fit the data surprisingly well. But FX markets are evolving rapidly in resp...
Technical Report
Full-text available
This paper examines the sources of private information in the interbank foreign-exchange market using a transactions database that includes trading-party identities. We show that sustained post-trade returns rise with bank size, implying that larger banks have an information advantage. The larger banks exploit this information advantage in placing...
Chapter
Full-text available
Electronic trading has transformed foreign exchange markets over the past decade, and the pace of innovation only accelerates. This formerly opaque market is now fairly transparent and transaction costs are only a fraction of their former level. Entirely new agents have joined the fray, including retail and high-frequency traders, while foreign exc...
Article
Using the longest data set on foreign exchange (FX) order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for 11 Asian...
Chapter
Micro-based exchange-rate research examines the determination and behavior of spot exchange rates in an environment that replicates the key features of trading in the foreign exchange (FX) market. This chapter provides an overview of micro-based research on exchange-rate determination. Recent micro-based research focuses on the link between currenc...
Article
Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for eleven Asian and Australasia...
Article
Full-text available
Is higher turnover in FX markets proof of greater liquidity or merely an illusion?
Article
Full-text available
Daily average foreign exchange market turnover reached $4 trillion in April 2010, 20% higher than in 2007. Growth owed largely to the increased trading activity of "other financial institutions", which contributed 85% of the higher turnover. Within this customer category, the growth is driven by high-frequency traders, banks trading as clients of t...
Technical Report
Full-text available
Using a market microstructure analytical framework we decompose the FX forward discount bias into elements due to time-varying risk premia (related to EBS order flow) and forecast errors derived using the Reuters survey of FX market participants. We find that both elements are significant contributors to the forward bias with risk premia being part...
Article
Full-text available
This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconom...
Article
Micro-based exchange-rate research examines the determination and behavior of spot exchange rates in an environment that replicates the key features of trading in the foreign exchange (FX) market. Traditional macro exchange-rate models play little attention to how trading in the FX market actually takes place. The implicit assumption is that the de...
Article
This paper investigates the validity of the law of one price (LOP) in international financial markets by examining the frequency, size and duration of inter-market price differentials for borrowing and lending services ('one-way arbitrage'). Using a unique data set for three major capital and foreign exchange markets that covers a period of more th...
Technical Report
This paper provides evidence of private information in the interdealer foreign exchange market. In so doing it provides support for the hypothesis that information is an important reason for the strong positive correlation between order flow and returns. It also provides evidence that information influences order-book structure. Our data comprise t...
Article
What is the role of “large players” like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are in the rear. We propose a model that allows both the l...
Article
This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than se...
Article
This paper provides evidence of private information in the interdealer foreign exchange market. In so doing it provides support for the hypothesis that information is an important reason for the strong positive correlation between order flow and returns. It also provides evidence that information influences order-book structure. Our data comprise t...
Technical Report
Full-text available
We study the role played by geographic and bank-size heterogeneity in the relation between exchange rate variability and market activity. We find some support for the hypothesis that increases in short-term global interbank market activity, which can be interpreted as due to variation in information arrival, increase variability. However, our resul...
Technical Report
Information is private if it's not known by all people and produces a better price forecast than public information alone" (Lyons, 2001, p. 26). This sim- ple statement is tested for the Swedish krona vs. euro foreign exchange using a unique data set on five major banks trading with end-users. These trades satisfy the first part of the definition f...
Chapter
The foreign exchange market can be divided in two segments: the interbank market and the customer market. Two advances in trading technology, electronic brokers in the interbank market and internet trading for customers, have significantly changed the structure of the foreign exchange market. In this chapter, we explain the functioning of electroni...
Technical Report
We examine the volume-volatility relation in the foreign exchange (FX) market using a unique data set from the Swedish krona (SEK) market that contains observations of 90-95 percent of all transactions from 1995 until 2002. We show that the strength of the volume-volatility relation depends on the group of market participants trading. Financial tra...
Article
Full-text available
This study sheds new light on the mixture of distribution hypothesis by means of a study of the weekly exchange rate volatility of the Norwegian krone. In line with other studies we find that the impact of information arrival on exchange rate volatility is positive and statistically significant, and that the hypothesis that an increase in the numbe...
Technical Report
If agents trade currencies as new information arrives to the market, and if this trading change exchange rates, then exchange rate volatility should be positively related to trading volume. This study is an investigation of this thesis on weekly basis for the Norwegian krone against the German mark from 1990 to 1998, and for the Norwegian krone aga...
Chapter
Full-text available
The relationship between volume and volatility has received much attention in the literature on financial markets. However, due to the lack of data, few results have been presented for the foreign exchange (FX) market. Furthermore, most studies contain only aggregate series, and cannot distinguish between the impact of different participants or ins...
Article
We present evidence that non-financial customers are the main liquidity providers in the overnight foreign exchange market using a unique daily data set covering almost all transactions in the SEK/EUR market over almost 10 years. Two main findings support this: (i) the net position of non-financial customers is negatively correlated with the exchan...
Article
We study dealer behavior in the foreign exchange spot market using detailed observations on all the transactions of four interbank dealers. There is strong support for an information effect in incoming trades. The direction of trade is most important, but we also find that the information effect increases with trade size in direct bilateral trades....
Chapter
Full-text available
This article looks at two new directions in financial economics - behavioural finance and the microstructure approach to foreign exchange - in order to cast light on mechanisms driving exchange rate movements. Changes in the Norwegian krone exchange rate during 2002 and 2003 are used as an example. The conclusion is that deviations from the "equili...
Chapter
Full-text available
The foreign exchange market can be divided in two segments: the interbank market and the customer market. Two advances in trading technology, electronic brokers in the interbank market and internet trading for customers, have significantly changed the structure of the foreign exchange market. In this chapter, we explain the functioning of electroni...
Article
Forex markets and the euro Dollar spreads: mark versus euro We compute bid-ask spreads for the dollar/euro exchange rate market and find them to be substantially larger than their deutschemark counterparts before introduction of the euro. We show that larger percentage spreads are not explained by volatility, trade intensity, and other standard exp...
Technical Report
Full-text available
We study the impact of order flow and volume using an unique data set of daily trading in the Swedish krona (SEK) market. The data set covers 95 per cent of worldwide SEK-trading, and is disag-gregated on 13 reporting banks' buying and selling with seven different counterparties in five different instruments. The preliminary sample covers the first...
Article
This paper tries to provide a simple explanation for the empirical finding, documented here and also by Hau, Killeen and Moore (2002), that spreads in the spot USD/EUR market are substantially higher than those in the preceding DEM/USD foreign exchange market. The paper argues that it is primarily the re-factoring of the exchange rate, 1.75 DEM per...
Technical Report
After the Meese & Rogoff 1983-results, researchers have searched with torch for macroeconomic variables with predictive power on horizons shorter than 6 months. Recently, several papers have showed that order flows influence exchange rates intradaily. Maybe order flow may be of importance also for lower frequencies than intraday, like the weekly fr...
Article
The introduction of electronic broker systems in the foreign exchange (FX) market at the end of 1992 changed the structure of the market and opened new channels for trading. We study the impact of these systems on dealer behavior, using a unique data set on the complete transactions of four FX dealers. We find some support for an information effect...
Article
Recent research point to the possible existence of private information in foreign exchange markets. Dealers claim that customer orders are their most important source of private information, and that banks with a large customer base have a competitive advantage. In this paper we test hypotheses on effects of private information using observations o...
Technical Report
In macroeconomic models exchange rates are determined by public information. Trading activities are completely irrelevant. In general, these models have low explanatory power for short horizons, which might be due to the possible existence of private information. Dealers in the foreign exchange market consider the order flow from customers to be th...
Technical Report
Full-text available
Recent research point to the possible existence of private information in for- eign exchange markets. Dealers claim that customer orders are their most impor- tant source of private information, and that banks with a large customer base have a competitive advantage. In this paper we test hypotheses on effects of private infor- mation using observat...

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