Heterogeneous Market-Making in Foreign Exchange Markets: Evidence from Individual Bank Responses to Central Bank Interventions |
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Authors: | ANUSHA CHARI |
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Institution: | Anusha Chari;is Assistant Professor of Finance, Ross School of Business, 701 Tappan Street, Ann Arbor MI 48109 (E-mail:). |
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Abstract: | Using high-frequency data this article provides evidence that, on average, central bank interventions lead to increased volatility and a widening of bid–ask spreads in the intra-day market for foreign exchange. The results also show that there is dispersion in the bid–ask spread revisions posted by individual banks in response to the central bank entering the market. The findings are consistent with predictions from standard models of market microstructure with heterogeneous agents and have implications for the market power of central banks as well as the payoff generated by trading large amounts of international reserves. |
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Keywords: | E58 F31 G14 |
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