Draft 2-7-2005 Making a Market in Foreign Exchange
نویسنده
چکیده
Making a Market in Foreign Exchange John A Carlson Purdue University Abstract In a foreign exchange market there may be no informed traders who have superior information about the market as a whole. Even so, a risk-neutral market maker is confronted with a form of adverse selection costs. A stylized model allows an analytical separation of adverse selection from inventory management costs. A third component of costs of market making arises when the equilibrium price cannot be observed after each trade. This is another aspect of adverse selection. The model also provides a link between the aggressiveness of inventory control and the magnitude of the negative autocorrelation in the change in the mid-point market price, often found in high frequency FX data.
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