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A Puzzle of Microstructure Market Maker Models
Author:
Rafael Romeunull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2004: Issue 006
Language:
English
Publication Date:
01 Jan 2004
DOI:
https://doi.org/10.5089/9781451842326.001
ISBN:
9781451842326
ISSN:
1018-5941
Pages:
24
Keywords:
WP; DM dealer; order flow coefficient; dealer's inventory; microstructure model; price setting
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This study addresses the empirical viability of microstructure models of dealer price setting. New evidence is presented rejecting these models' specifications of how information asymmetry and inventory accumulation affect dealer pricing. This rejection is consistent with those of other dealer-level empirical studies. This study suggests a new modeling option may be to reconsider optimal price setting while relaxing assumptions that specify incoming orders as the only component through which dealer inventories evolve. This approach is consistent with inventory evolution data and with general equilibrium models' assumptions about currency markets.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2004: Issue 006