NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tests of Microstructural Hypotheses in the Foreign Exchange Market

Richard K. Lyons

NBER Working Paper No. 4471
Issued in September 1993
NBER Program(s):   IFM

This paper introduces a three-part transactions dataset to test various microstructural hypotheses about the spot foreign exchange market. In particular, we test for effects of trading volume on quoted prices through the two channels stressed in the literature: the information channel and the inventory-control channel. We find that trades have both a strong information effect and a strong inventory-control effect, providing support for both strands of microstructure theory. The bulk of equity-market studies also find an information effect; however, these studies typically interpret this as evidence of inside information. Since there are no insiders in the foreign exchange market, this finding suggests a broader conception of the information environment, at least in this context.

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Document Object Identifier (DOI): 10.3386/w4471

Published:

  • Journal of Financial Economics, October 1995, vol. 39, pp. 321-351 citation courtesy of
  • Microstructure: The Organization of Trading and Short-Term Price Behavior, Stoll, E., ed.: Elgar Publishing, April 1999, pp. 409-439.

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