An Intraday Pricing Model of Foreign Exchange Markets

36 Pages Posted: 29 Jan 2006

See all articles by Rafael Romeu

Rafael Romeu

International Monetary Fund (IMF)

Date Written: June 2003


Market makers learn about asset values as they set intraday prices and absorb portfolio flows. Absorbing these flows causes inventory imbalances. Previous work has argued that market makers change prices to manage incoming flows and offset inventory imbalances. This study argues that they have multiple instruments, or ways to manage inventory imbalances and learn about evolving asset values. Hence, they smooth inventory levels and update prior information about assets using multiple instruments. In ignoring other instruments, previous studies have ignored the information that these provide and overemphasize the role of price changes in inventory management. The model presented here provides new estimates of asymmetric information and inventory effects, the price impact of each instrument, the cost of liquidity, and the impact of an intervention on these costs.

Keywords: Foreign Exchange, Microstructure, International Macroeconomics

JEL Classification: G15, F31

Suggested Citation

Romeu, Rafael, An Intraday Pricing Model of Foreign Exchange Markets (June 2003). IMF Working Paper No. 03/115, Available at SSRN:

Rafael Romeu (Contact Author)

International Monetary Fund (IMF) ( email )

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

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