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Puzzles in the Tokyo fixing in the forex market: Order imbalances and Bank pricing

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  • Ito, Takatoshi
  • Yamada, Masahiro

Abstract

“Fixing” in the foreign exchange market determines the mid-point exchange rate that is applied to spot foreign exchange transactions between banks and bank customers. The paper analyzed the Tokyo fixing practices, which allow each bank to announce the fixing rate based on the interbank exchange rate transactions at 9:55a.m. Based on volumes of customer orders, submitted for transaction at the fixing price, banks submit orders to the interbank market at the fixing time window. Three puzzles regarding the Tokyo fixing are: (1) the spikes in prices at the fixing time occur despite a high level of liquidity in the market; (2) the order flows before the fixing are biased toward the dollar, which generates a predictable price pattern; and (3) the bank-announced fixing rates are biased toward dollar appreciation. These puzzles can be explained as a consequence of unique institutional features of the Tokyo fixing and of banks' real-side customers in Japan.

Suggested Citation

  • Ito, Takatoshi & Yamada, Masahiro, 2017. "Puzzles in the Tokyo fixing in the forex market: Order imbalances and Bank pricing," Journal of International Economics, Elsevier, vol. 109(C), pages 214-234.
    • Handle: RePEc:eee:inecon:v:109:y:2017:i:c:p:214-234
    DOI: 10.1016/j.jinteco.2017.09.005
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    Cited by:

    1. Alain Chaboud & Dagfinn Rime & Vladyslav Sushko, 2023. "The foreign exchange market," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 12, pages 253-275, Edward Elgar Publishing.
    2. Ito, Takatoshi & Yamada, Masahiro, 2018. "Did the reform fix the London fix problem?," Journal of International Money and Finance, Elsevier, vol. 80(C), pages 75-95.
    3. Aldo Barrios & Rob Franolic & Davide Giovanardi & Michael Melvin, 2022. "Trading with the Informed and against the Uninformed: Flows and Positioning in the Global Currency Market," CESifo Working Paper Series 9921, CESifo.

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    More about this item

    Keywords

    Foreign exchange markets; Fixing; Tokyo fixing; WM/Reuters; Efficient market; Spikes; Prehedge;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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