Price discovery in electronic foreign exchange markets: The sterling/dollar market

Abstract

This study finds that GLOBEX has a marginally lower Hasbrouck, J. (1995) information share than Reuters D3000 in the electronic sterling/dollar foreign exchange market when returns are computed from high frequency data on either midquotes or transaction prices. However, GLOBEX's information share declines sharply when returns are computed from a mixture of GLOBEX transaction prices and Reuters D3000 midquotes. This helps explain why prior studies using this latter methodology report relatively low information shares for GLOBEX in the yen/dollar market. Variations in GLOBEX's information share on an intraday basis can be explained by variations in relative liquidity, spreads and price volatility. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:590–606, 2010

Price Discovery in Currency Markets: Evidence from Three Emerging Markets

“…A conflicting position is drawn when Cabrera, Wang and Yang (2009) report that information found in the spot market leads the futures market for the euro and lags for the yen. Drawing on Poskitt (2010), a reason for this controversial result lies in the differences in the methodologies that are employed in these studies. There is also a difference in measurement: returns are calculated from mid-quotes in the spot market as compared to the use of transaction prices in the futures markets.…”

Who has the final say?

“…Previous studies in current literature suggest that a market's IS is influenced by its trading volume, transaction costs, and volatility (Poskitt, 2010). Active trading can attract more informed traders to the market, strengthening the role the market plays in the price discovery process (Chakravarty et al , 2004).…”

The US Financial Crisis and the Behavior of the Foreign Exchange Market

“…Several studies have investigated the price discovery between different markets, for instance, between equity returns and their corresponding futures products (see, among others, Cheung and Ng (1990), Chan (1992), Fleming, Ostdiek, and Whaley (1996), Poskitt (2009), andDe Boyrie, Pavlova, and). Though it is still unsettled, some researchers indicate that the futures markets' response to the new information arrival is quicker than that of the equity markets due to the requirement of a smaller capital margin (the so-called "leverage hypothesis").…”

“…However, some studies show that the results from Gonzalo and Granger (1995) are qualitative similar to Hasbrouck information share (for example, Poskitt (2009)). …”

“…Poskitt (2009) compares two different electronic trading service providers on foreign exchange markets, namely GLOBEX and Reuter D3000. The finding explains why previous literature documents low information share for GLOBEX when return is computed from transaction prices.…”