A Unifying Microstructure Framework for Modeling Intraday and Interday Asset Pricing Dynamics: the Case of Exchange Rates |
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| Authors: | Thierry Chauveau,& Richard Topol |
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| Affiliation: | CEBI-TEAM, University Paris-I-Panthéon-Sorbonne and CDC-Marchés/FMR, Caisse des dépo^ts, 75007 Paris, France,;C.N.R.S. and O.F.C.E., O.F.C.E., 75007 Paris, France |
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| Abstract: | A model of the dynamics of intradaily exchange rates is presented. The current Over‐The‐Counter (OTC) exchange rate is the quote of the quoting bank.Two polar cases are considered: (i) If each bank is able to observe the noises relative to the orders of its own clients, then the OTC exchange rate is shown to obey a random walk with a constant conditional variance. (ii) If each bank is not able to observe the noises relative to the orders of its own clients, the OTC exchange rate is no more a random walk and conditional heteroskedasticity appears.
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| Keywords: | ARCH models exchange rate intraday market microstructure stochastic volatility models |
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