New Economics Papers
on Market Microstructure
Issue of 2009‒01‒17
two papers chosen by
Thanos Verousis

  1. Asymmetric information in the interbank foreign exchange market By Geir H. Bjønnes; Carol L. Osler; Dagfinn Rime
  2. Information Exchange and the Limits of Arbitrage By Gray, Wesley

  1. By: Geir H. Bjønnes (Norwegian School of Management (BI),); Carol L. Osler (Brandeis International Business School); Dagfinn Rime (Norges Bank (Central Bank of Norway)and Norwegian University of Science and Technology (NTNU))
    Abstract: 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 the complete record of interdealer trades at a good-sized Scandinavian bank during four weeks in 1998 and 1999, including bank identities. Our results indicate that larger banks have more information than smaller banks, that the relation between order flow and returns is stronger for larger banks than smaller banks, and that larger banks exploit their information advantage in limit-order placement.
    Keywords: Foreign exchange, microstructure, asymmetric information, liquidity premium
    JEL: G15 F31 F33
    Date: 2009–01–08
  2. By: Gray, Wesley
    Abstract: Evidence suggests that arbitragers exchange investment ideas. We analyze why and under what circumstances sharing occurs. Our model suggests that sharing ideas will lead to the following: more efficient asset prices, larger arbitrager profits, and correlated arbitrager returns. We predict that arbitragers will exchange ideas in markets where arbitragers are capital constrained, noise trader influence is high, and arbitrage investors are more loss averse. We also predict that arbitrage networks can lead to crowded trades, which can create systematic risk in extreme market circumstances.
    Keywords: Arbitrage; hedge funds; market efficiency; information exchange; loss aversion; crowded trades
    JEL: G14 G12 G11 G23 G10
    Date: 2008–12–31

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