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Market microstructure effects of government intervention in the foreign exchange market

Bossaerts, Peter and Hillion, Pierre (1991) Market microstructure effects of government intervention in the foreign exchange market. Review of Financial Studies, 4 (3). pp. 513-541. ISSN 0893-9454. doi:10.1093/rfs/4.3.513.

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As asymmetric information model of the bid - ask spread is developed for a foreign exchange market subject to occasional government interventions. Traditional tests of the unbiasedness of the forward rate as a predictor of the future spot rate are shown to be inconsistent when the rates are measured as the average of their respective bid and ask quotes. Larger bid - ask spreads on Fridays are documented. Reliable evidence of asymmetric bid - ask spreads for all days of the week, albeit more pronounced on Fridays, are presented. The null hypothesis that the forward rate is an unbiased predictor of the future spot rate continues to be rejected. The regression slope coefficients increase toward unity, however, indicating a less variable risk premium.

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Bossaerts, Peter0000-0003-2308-2603
Additional Information:© 1991 the Society for Financial Studies Comments from the participants of the Groupe HEC finance seminar, the AFFI conference (Paris). the ESF-CEPR conference (Lausanne), the WFA Meetings (Santa Barbara). the IMI Group Conference (Rome), and the EFA Meetings (Athens) are gratefully acknowledged, especially B. Biasis, M. Melvin, E. Roell, and M. Tivegna. We have benefited from the comments and suggestions of the editor (Chester Spatt), and the referee (Paul Pfleiderer). The first author expresses his gratitude for the hospitality of the Sloan School of Management, Massachusetts Institute of Technology, where part of this paper was written. This research was completed thanks to the financial support of INSEAD (Research project # 2184R).
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Deposited On:18 Jan 2006
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