Foreign Exchange Market Microstructure: A Closer Look

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9409959 Lyons This research will examine the microstructure of foreign exchange markets. The work includes both theoretical and empirical dimensions, each of which enhances its policy relevance. The theoretical dimensions of the project will examine the link between the microstructure of these markets, for example the behavior of individual traders and the macro-relevant aspect of these markets, for example forward exchange rate bias. The empirical part of the project focuses on understanding how foreign exchange markets work. This part of the study uses a unique data set to examine the effects of the pace of market activity on prices and quantities of trades, etc. The data contain information on quotes, trades, and inventory positions of a foreign exchange dealer at identified points in time. The study also examines the policy implications of what is understood about the behavior of foreign exchange markets. This project is important because it promises to improve our understanding of how foreign exchange markets work at a time when several countries are in transition towards market economies, and each country is seeking better ways to organize the market that sets its foreign exchange rates.