PRICE DISCOVERY IN FX MARKETS: A COMPREHENSIVE COMPARISON OF INDICATIVE AND FIRM QUOTES

Date

2024-8-22

Author

ÖZTÜRK, Derya Ezgi

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This dissertation provides a comprehensive analysis of the price discovery process in the foreign exchange market by comparing the indicative quotes from the Reuters Platform and tradeable/firm quotes from the Reuters Matching System. Comparing tradeable quotes with indicative quotes enhances the understanding of the price discovery process in foreign exchange markets, as these two types of quotes have important structural differences due to their trading environment. Several studies have been conducted on price discovery in the stock market based on cross-listed stocks; however, this issue is under-investigated for the foreign exchange market since the market is highly fragmented and price and trade data for several platforms are not easily accessible. Moreover, the few studies conducted on the subject find contradicting results. In this dissertation, first, by utilizing updated data, the prevailing uncertainty regarding which quotation type leads in price discovery is clarified. The findings indicate that the Reuters Matching System generally dominates price discovery. This dominance is evidenced by the substantial variation in currency pairs, particularly when considering the information and component share measures. However, it is shown that indicative quotes also play a significant role, with their information leadership shares reaching at least 40% in most exchange rates. The significant differences observed between the estimated price discovery measures underscore the importance of selecting appropriate price discovery metrics. The study also identifies the determinants of price discovery, revealing that the bid-ask spread, number of quotations, and volatility are significant market variables influencing price discovery between indicative and tradeable quotations.

Subject Keywords

FX Market, Price Discovery, Price Discovery Measures

URI

https://hdl.handle.net/11511/110635

Collections

Graduate School of Social Sciences, Thesis