A Puzzle of Microstructure Market Maker Models

24 Pages Posted: 15 Feb 2006

See all articles by Rafael Romeu

Rafael Romeu

International Monetary Fund (IMF)

Date Written: January 2004

Abstract

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.

Keywords: Foreign Exchange, Microstructure, Inventory, Information, Market Makers

JEL Classification: C52, G15, F31

Suggested Citation

Romeu, Rafael, A Puzzle of Microstructure Market Maker Models (January 2004). IMF Working Paper No. 04/6, Available at SSRN: https://ssrn.com/abstract=878829

Rafael Romeu (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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