NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Price Discovery and Liquidity Recovery: Forex Market Reactions to Macro Announcements

Masahiro Yamada, Takatoshi Ito

NBER Working Paper No. 27036
Issued in April 2020
NBER Program(s):International Finance and Macroeconomics, Monetary Economics

We examine whether the forex market quality, measured by the speed of price discovery and liquidity recovery after macro statistics announcements, has improved using the EBS high-frequency data for 20 years. Considering the recent rise of computer-based trading, a popular conjecture is that the market quality has improved. Our empirical analysis, however, suggests that an improving trend is only observed in price discovery. Moreover, two measures are negatively correlated because an increasing number of traders improves liquidity but slows down price discovery. Theoretically, the latter finding implies that “fast” traders have a poor interpretation of how the news will impact prices.

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Document Object Identifier (DOI): 10.3386/w27036

 
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