Microstructure of Foreign Exchange Markets

Oxford Research Encyclopedia of Economics and Finance ◽

10.1093/acrefore/9780190625979.013.318 ◽

2019 ◽

Author(s):

Martin D. D. Evans ◽

Dagfinn Rime

Keyword(s):

Exchange Rate ◽

Empirical Research ◽

Foreign Exchange ◽

Foreign Exchange Markets ◽

Exchange Markets ◽

Institutional Features ◽

Exchange Rate Models ◽

Fx Trading ◽

Areas Of Interest ◽

Exchange Rate Economics

An overview of research on the microstructure of foreign exchange (FX) markets is presented. We begin by summarizing the institutional features of FX trading and describe how they have evolved since the 1980s. We then explain how these features are represented in microstructure models of FX trading. Next, we describe the links between microstructure and traditional macro exchange-rate models and summarize how these links have been explored in recent empirical research. Finally, we provide a microstructure perspective on two recent areas of interest in exchange-rate economics: the behavior of returns on currency portfolios, and questions of competition and regulation.

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The long-run effects of geopolitical risk on foreign exchange markets: evidence from some ASEAN countries

International Journal of Emerging Markets ◽

10.1108/ijoem-08-2020-1001 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Hon Chung Hui

Keyword(s):

Exchange Rate ◽

Exchange Rates ◽

Foreign Exchange ◽

Risk Index ◽

Foreign Exchange Markets ◽

Content Type ◽

Long Run ◽

Exchange Markets ◽

Exchange Rate Models ◽

Asean Countries

PurposeThe purpose of this paper is to analyse the long-run relationship between geopolitical risk and exchange rates in four ASEAN countries.Design/methodology/approachWe augment theoretical nominal exchange rate models available in the literature with the geopolitical risk index developed by Caldara and Iacoviello (2019), and then estimate these models using the ARDL approach to Cointegration.FindingsOur analysis uncovers evidence of Cointegration in the exchange rate models when the MYR-USD, IDR-USD, THB-USD and PHP-USD exchange rates are used as dependent variable. Next, geopolitical risk is a significant long-run driver for these exchange rates. Third, in all countries higher geopolitical risk leads to a depreciation of domestic currency.Research limitations/implicationsThere are implications for entrepreneurs, central banks, portfolio managers and arbitrageurs who actively trade in financial markets. Financial market players can benefit from a better understanding of how geopolitical events affect the portfolio of financial assets across various countries, while entrepreneurs can work out hedging strategies.Originality/valueThis is a contribution to the study of interlinkages between political risk and foreign exchange markets. It is the first study to adopt the geopolitical risk index of Caldara and Iacoviello (2019) to the study the foreign exchange markets of ASEAN countries.

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