Richard Payne’s scientific contributions

We generalise the Evans-Lyons portfolio shifts model to allow FX dealers to use both limit and market orders to exploit private information in inter-dealer trading. The model predicts that exchange rates depend on both types of flows, but that limit orders have lower price impact than market orders. We test these predictions using data from an order-driven inter-dealer FX trading venue. Our analysis supports the predictions of the model, with limit order flows having strong explanatory power and with the empirical price impact of market order flows being substantially increased by the inclusion of limit orders as an additional variable.