Financial distress, dealers' behavior and asset pricing in the foreign exchange market
Name
1036985360-MIT.pdf
Description
Full printable version
Size
5.11 MB
Format
Adobe PDF
Checksum (MD5)
373fa40381cb6f7835a58ea50b2ac665
Author(s)
Fourel, Valère (Valère Renaud Ernst)
Advisor(s)
Adrien Verdelhan.
Date Issued
2018
Publisher
Massachusetts Institute of Technology
Abstract
Exploiting a high frequency dealer-specific quote database in the FX market, I show that shocks to the CDS of a financial intermediary, proxy for its financial wealth, makes her quote larger bid-ask spreads when uncertainty about the underlying traded asset is high or when market competition is low. I first establish that markets are dominated by a handful of dealers who are responsible for more than 90% of the quotes in the different FX spot markets. I then document that, when exchange rate volatility is high, a 1% increase in intermediary's default probability does translate into a 4 bps increase in the bid-ask spread that she quotes. When competition is low, a similar deterioration in financial wealth leads to a 6.4 bps increase in bid-ask spread size. I finally show that in the case of emerging country currencies, the average CDS spread of the financial intermediaries quoting in the FX market is a statistically significant predictor for the volatility of the idiosyncratic component of the currency risk premium. More surprisingly, the dispersion in terms of financial wealth across financial intermediaries, measured as the variance of the financial intermediaries CDS spreads, is also an important determinant of this volatility for a large set of emerging country currencies.
Description
Thesis: S.M. in Management Research, Massachusetts Institute of Technology, Sloan School of Management, 2018.
Cataloged from PDF version of thesis.
Includes bibliographical references (pages 39-43).
Subjects
Sloan School of Management.
MIT Department
Sloan School of Management
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