Product DescriptionThis digital document is a journal article from Journal of International Financial Markets, Institutions & Money, published by Elsevier in . The article is delivered in HTML format and is available in your Amazon. com Media Library immediately after purchase. You can view it with any web browser. Description: This paper develops a Cournot model of rival dealers placing limit orders with a broker, who in turn makes a market by acting as a liaison between dealers. The broker’s limit-book lists the various prices and quantities at which dealers are willing to exchange currency vis-a-vis electronic broking. The size and volatility of the inside spread is simulated relative to dealer entry-exit and the price elasticity of linear order arrival functions. Our simulations reveal non-linear price dynamics from dealer participation in market development, with an additional rival narrowing the inside spread by 1. 82% while diminishing its volatility. These findings may shed some light on the ”excess volatility puzzle” raised by Killeen, Lyons and Moore (forthcoming) as to why price behavior under flexible exchange rate regimes is significantly more volatile than macro fundamentals would suggest. raised by Killeen, Lyons and Moore (Fixed versus floating exchange rates: lessons from order flow. Journal of International Money and Finance, forthcoming) as to why price behavior under flexible exchange rate regimes is significantly more volatile than macro fundamentals would suggest.
Cournot model of brokered FX trading
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