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Forex Trading and the WMR Fix

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  • Evans, Martin

Abstract

I examine the behavior of forex prices around the setting of the 4:00 pm WMR Fix. Numerous banks have been fined by regulators for their trading activities around the Fix, but the overall impact of their actions is not known. I first examine trading patterns around the Fix in a microstructure model of competitive trading. I then compare the model with the empirical behavior of forex prices across 21 currencies over a decade. Contrary to the predictions of the model, forex price changes display extraordinary volatility and negative serial correlation around the Fix.

Suggested Citation

  • Evans, Martin, 2017. "Forex Trading and the WMR Fix," MPRA Paper 81583, University Library of Munich, Germany, revised 25 Sep 2017.
    • Handle: RePEc:pra:mprapa:81583
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    References listed on IDEAS

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    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    2. Bjonnes, Geir Hoidal & Rime, Dagfinn, 2005. "Dealer behavior and trading systems in foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 75(3), pages 571-605, March.
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    4. Melvin, Michael & Prins, John, 2015. "Equity hedging and exchange rates at the London 4p.m. fix," Journal of Financial Markets, Elsevier, vol. 22(C), pages 50-72.
    5. Yamada, Masahiro & Ito, Takatoshi, 2017. "The forex fixing reform and its impact on cost and risk of forex trading banks," Finance Research Letters, Elsevier, vol. 21(C), pages 157-162.
    6. Hendershott, Terrence & Menkveld, Albert J., 2014. "Price pressures," Journal of Financial Economics, Elsevier, vol. 114(3), pages 405-423.
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    8. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
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    12. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.
    13. Vila, Jean-Luc, 1989. "Simple games of market manipulation," Economics Letters, Elsevier, vol. 29(1), pages 21-26.
    14. repec:bla:jfinan:v:53:y:1998:i:3:p:1111-1130 is not listed on IDEAS
    15. Comerton-Forde, Carole & Putnins, Talis J., 2011. "Measuring closing price manipulation," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 135-158, April.
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    17. Takatoshi Ito & Masahiro Yamada, 2015. "Was the Forex Fixing Fixed?," NBER Working Papers 21518, National Bureau of Economic Research, Inc.
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    Cited by:

    1. 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.
    2. Evans, Martin, 2020. "Exchange Rates and Liquidity Risk," MPRA Paper 102702, University Library of Munich, Germany.
    3. 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.
    4. Yamada, Masahiro & Ito, Takatoshi, 2017. "The forex fixing reform and its impact on cost and risk of forex trading banks," Finance Research Letters, Elsevier, vol. 21(C), pages 157-162.
    5. Liu, Tao, 2014. "The onshore-offshore interaction of RMB market: a high-frequency analysis," MPRA Paper 63905, University Library of Munich, Germany.
    6. Stenfors, Alexis, 2018. "Bid-ask spread determination in the FX swap market: Competition, collusion or a convention?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 54(C), pages 78-97.
    7. Takatoshi Ito & Masahiro Yamada, 2016. "Puzzles in the Forex Tokyo “Fixing”: Order Imbalances and Biased Pricing by Banks," NBER Working Papers 22820, National Bureau of Economic Research, Inc.
    8. Takatoshi Ito & Masahiro Yamada, 2015. "Was the Forex Fixing Fixed?," NBER Working Papers 21518, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Forex Trading; Order Flows; Forex Price Fixes; Microstructure Trading Models;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G1 - Financial Economics - - General Financial Markets

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