Irish bilateral:The Impact of Electronic Trading on International Financial Markets
Lead Research Organisation:
Queen's University Belfast
Department Name: Queens University Management School
Abstract
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Organisations
Publications
Dunne P
(2007)
Benchmark Status in Fixed-Income Asset Markets
in Journal of Business Finance & Accounting
Dunne P
(2008)
The market response to information quality shocks: the case of Enron
in Applied Financial Economics
Dunne P
(2010)
International order flows: Explaining equity and exchange rate returns
in Journal of International Money and Finance
Lyons R
(2009)
An information approach to international currencies
in Journal of International Economics
Moore M
(2008)
Volatile and persistent real exchange rates with or without sticky prices
in Journal of Monetary Economics
Moore M
(2010)
Solving exchange rate puzzles with neither sticky prices nor trade costs
in Journal of International Money and Finance
Rose N
(2008)
Race, Risk and Medicine in the Age of 'Your Own Personal Genome'
in BioSocieties
| Description | In "Volatile and persistent real exchange rates with or without sticky prices", the flexible-price two-country monetary model was extended to include a consumption externality with habit persistence. The theory was capable of explaining the high volatility and persistence of real and nominal exchange rates as well as the high correlation between real and nominal rates. In "An information approach to international currencies", we developed a new theory of vehicle currencies. Models of currency competition focus on the 5% of trading attributable to balance-of-payments flows. We introduced an information approach that focuses on the other 95%. Important departures from traditional models arise when transactions convey information. First, prices reveal different information depending on whether trades are direct or though vehicle currencies. Second, missing markets arise due to insufficiently symmetric information, rather than insufficient transactions scale. Third, the indeterminacy of equilibrium that arises in traditional models is resolved: currency trade patterns no longer concentrate arbitrarily on market size. Empirically, we provided a first analysis of transactions across a full market triangle: the euro, yen and US dollar. The estimated transaction effects on prices support the information approach. In "International order flows: explaining equity and exchange rate returns", we modelled equity price and exchange rate behaviour based on a concept from microstructure-order flow. We obtained a theoretical relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we constructed daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily S&P returns. The model implications were also validated for intraday returns. Plans for future research include the following: The European sovereign bond market is the world's largest market for debt securities. With an outstanding aggregate value of approximately 4,395.9 billion Euros in 2006, it exceeds the size of the U.S. sovereign bond market with an aggregate value of roughly 4,413.5 billion Dollars (around 3 trillion Euros, at the moment). Transaction spreads are generally small in the interdealer market. However, do these favourable market conditions in the interdealer market also translate into favourable trading conditions in the customer segment of the bond market, in which smaller banks and other financial institutions request quotes from the primary dealers? As with many other markets, these wholesale customers do not have access to the interdealer trading platforms. Does dealer intermediation impose considerable costs for the clients? What determines the quality of customer quotes and their dispersion? These are very important and pressing policy concerns for European security regulators. |
| Exploitation Route | The publications "Transparency proposals for European sovereign bond markets" as well as "Benchmark status in fixed-income asset markets" are relevant to the regulation of bond markets in Europe. These are pertinent because of the evolution of The Markets in Financial Instruments Directive (MiFID). The re-evaluation of financial regulation throughout Europe in the light of the banking collapse adds an additional urgency. Specifically, the crisis over the national debts of Greece and other highly indebted euro-zone countries makes our research into sovereign paper immediate in its importance. At present, the only international vehicle currencies are the dollar and to a lesser extent the euro. The Bank of Japan has discouraged the development of the yen as an international currency but there are clear signs that the People's Bank of China anticipates a major role for the renminbi/yuan. The paper "An Information Approach to international Currencies" speaks to the debate on the emerging international role of the euro and the currency competition that it faces. The relationship between domestic and international bond and equity markets is critical to such a debate and the paper "International order flows: explaining equity and exchange rate returns" helps to understand this nexus. |
| Sectors | Financial Services, and Management Consultancy,Government, Democracy and Justice |
| Description | The findings have improved our understanding of electronic trading markets particularly in foreign exchange |
| First Year Of Impact | 2007 |
| Sector | Financial Services, and Management Consultancy,Government, Democracy and Justice |
| Impact Types | Economic |