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Discussion Paper
Towards Increasing Complexity: The Evolution of the FX Market
The foreign exchange market has evolved extensively over time, undergoing important shifts in the types of market participants and the mix of instruments traded, within a trading ecosystem that has become increasingly complex. In this post, we discuss fundamental changes in this market over the past twenty-five years and highlight some of the implications for its future evolution. Our analysis suggests that maintaining a healthy price discovery process and fostering a level playing field among participants are areas to watch for challenges. The consequences of the evolution of the FX ...
Report
All-to-All Trading in the U.S. Treasury Market
Although the U.S. Treasury market remains the deepest and most liquid securities market in the world, several episodes of market dysfunction over recent years have brought the market’s resilience into focus. The adoption of all-to-all trading in the Treasury market could be one avenue to strengthening market resilience. Conceptually, all-to-all trading would allow any market participant to trade directly with any other market participant. This could be helpful in times of stress when the capacity of traditional intermediaries may be tested. In this article, we discuss what all-to-all ...
Discussion Paper
The Global Dash for Cash in March 2020
The economic disruptions associated with the COVID-19 pandemic sparked a global dash-for-cash as investors sold securities rapidly. This selling pressure occurred across advanced sovereign bond markets and caused a deterioration in market functioning, leading to a number of central bank actions. In this post, we highlight results from a recent paper in which we show that these disruptions occurred disproportionately in the U.S. Treasury market and offer explanations for why investors’ selling pressures were more pronounced and broad-based in this market than in other sovereign bond markets.
Working Paper
Uncovered interest parity: it works, but not for long
The failure of uncovered interest parity can be ascribed to the existence of a risk premium. The size of this risk premium may shrink to zero over sufficiently small intervals of time. In contrast, because no interest is paid on intradaily positions and interest is instead paid discretely at the point when a position is rolled over from one day to the next, the size of the interest differential remains fixed over any interval that covers the time of the discrete interest payment. This is true no matter how short that interval is. Using a large dataset of high frequency exchange rate data, we ...
Working Paper
What drives volatility persistence in the foreign exchange market?
We analyze the factors driving the widely-noted persistence in asset return volatility using a unique dataset on global euro-dollar exchange rate trading. We propose a new simple empirical specification of volatility, based on the Kyle-model, which links volatility to the information flow, measured as the order flow in the market, and the price sensitivity to that information. Through the use of high-frequency data, we are able to estimate the time-varying market sensitivity to information, and movements in volatility can therefore be directly related to movements in two observable variables, ...
Report
The Global Dash for Cash: Why Sovereign Bond Market Functioning Varied across Jurisdictions in March 2020
As the economic disruptions associated with the COVID-19 pandemic increased in March 2020, there was a global dash-for-cash by investors. This selling pressure occurred across advanced sovereign bond markets and caused a deterioration in market functioning, leading to central bank interventions. We show that these market disruptions occurred disproportionately in the U.S. Treasury market and were due to investors’ selling pressures being far more pronounced and broad-based. Furthermore, we assess differences in key drivers of the market disruptions across sovereign bond markets, based on an ...
Report
Liquidity and Trading Dynamics in the Off-the-Run U.S. Treasury Market
In this article, we study trading activity and liquidity of off-the-run U.S. Treasury securities. Off-the-run Treasuries are seasoned securities, account for about 98 percent of all Treasuries outstanding, and played a central role in the pandemic-fueled dash-for-cash in March 2020. Understanding these securities better can improve thinking around how market resilience might be improved. We document and discuss the evolution of trading activity and liquidity for these securities and how these attributes differ from on-the-run securities. We also consider several potential market structure ...
Working Paper
The high-frequency effects of U.S. macroeconomic data releases on prices and trading activity in the global interdealer foreign exchange market
We introduce a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market, data not previously available to researchers. The data also gives live transactable quotes, rather than the indicative quotes that have been used in most previous high frequency foreign exchange analysis. We describe intraday volume and volatility patterns in euro-dollar and dollar-yen trading. We study the effects of scheduled U.S. macroeconomic data releases, first confirming the finding of recent literature that the conditional ...