A Puzzle of Microstructure Market Maker Models

Author/Editor:

Rafael Romeu

Publication Date:

January 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This study addresses the empirical viability of microstructure models of dealer price setting. New evidence is presented rejecting these models' specifications of how information asymmetry and inventory accumulation affect dealer pricing. This rejection is consistent with those of other dealer-level empirical studies. This study suggests a new modeling option may be to reconsider optimal price setting while relaxing assumptions that specify incoming orders as the only component through which dealer inventories evolve. This approach is consistent with inventory evolution data and with general equilibrium models' assumptions about currency markets.

Series:

Working Paper No. 2004/006

Subject:

Currencies Currency markets Exchange rate modelling Exchange rates Purchasing power parity

English

Publication Date:

January 1, 2004

ISBN/ISSN:

9781451842326/1018-5941

Stock No:

WPIEA0062004

Pages:

24

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