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Foreign exchange customers and dealers: Who’s driving whom?
Institution:1. Escuela de Negocios, Universidad Adolfo Ibáñez, Diagonal Las Torres 2640 Office 533-C, 7941169, Peñalolén, Santiago, Chile;2. Financial Regulation Center – CREM, Faculty of Economics and Business, Universidad de Chile, Santiago, Chile;1. Department of Accounting and Finance, School of Business & Economics, North Carolina A& T State University, 1621 East Market Street, Greensboro, NC 27411, United States;2. University of Cape Town, School of Economics, Research Unit in Behavioural Economics and Neuroeconomics, Private Bag 5-3b, Rondebosch 7701, South Africa;3. Institute for Innovation and Technology Management, Ted Rogers School of Management, Ryerson University, 575 Bay, Toronto, ON M5G 2C5, Canada;1. Department of Emergency Medicine, National Taiwan University Hospital, Taipei, Taiwan;2. Graduate Institute of Epidemiology and Preventive Medicine, National Taiwan University, Taipei, Taiwan;3. Stroke Center and Department of Neurology, National Taiwan University Hospital, Taipei, Taiwan;4. Department of Emergency Medicine, Oregon Health and Science University, Portland, OR, USA;1. School of Mechanical & Mining Engineering, University of Queensland, Brisbane, Qld 4072, Australia;2. Institute of Sound and Vibration Research, University of Southampton, Highfield, Southampton SO17 1BJ, UK;1. Department of Physics, National Institute of Technology Agartala, Tripura 799055, India;2. Department of Physics and Meteorology, Indian Institute of Technology, Kharagpur 721302, India
Abstract:This paper tests the theoretical assumption of the foreign exchange market microstructure that dealers and non-dealer customers interact over discrete trading rounds. An exhaustive frequency-domain analysis reveals that the interaction is limited and mainly due to the instability of financial markets. The principal finding is that the trading activity of dealers is able to predict the customer order flow at low frequencies with wavelengths longer than roughly a week. In all, the evidence shows that non-financial customers are not as passive as some other research has suggested.
Keywords:Foreign exchange market  Market microstructure  Order flow  Frequency-domain  Causality
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