NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Strategic Trading in a Two-Sided Foreign Exchange Auction

Linda Goldberg, Rafael Tenorio

NBER Working Paper No. 5187
Issued in July 1995
NBER Program(s):International Finance and Macroeconomics

The market microstructure chosen for foreign exchange markets can influence trading volumes and equilibrium exchange rates. With emerging markets and developing countries increasingly utilizing two- sided auctions, we show that the choice of the discrete 'tƒtonnement' auction creates incentives for strategic behavior among market participants. We provide theoretical predictions on strategic under- revelation of demand or supply positions that are supported empirically using detailed data from a rare example of a tƒtonnement market, the Moscow Interbank Currency Exchange. Our results also are consistent with findings from experimental work on auctions: new entrants altered strategic behavior mainly on the market's demand side, without comparable implications for the supply side. We also show that bids and offers were influenced by fundamentals and specific policy measures.

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Document Object Identifier (DOI): 10.3386/w5187

Published: Journal of International Economics, 1997, vol.42/3-4.

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