Trading in Foreign Exchange Markets. Four Essays on the Microstructure of Foreign Exchange
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This dissertation is a collection of four essays on the trading activities in the foreign exchange market. Trading has traditionally not been an issue in research on the foreign exchange market. This has changed during the last decade. In my dissertation the subject is approached from the theory of market microstructure. Market microstructure theory studies the consequences for financial markets of heterogeneous agents, private information, and different trading institutions. I believe that a dissertation on this subject may be justified given (i) the importance of the foreign exchange market, (ii) the shortcomings of our understanding of the market, (iii) the evidence that important assumptions of earlier theories may be violated, and (iv) the promising results so far of this recent approach. The essays in this dissertation divide naturally into two groups, with two essays in each. The first two essays address intraday dealer behavior in the interbank market. These two essays are written together with Geir Hoidal Bjonnes. The last two essays address the effect of order flow on the aggregate market level. The essays use two publicly available data sets on weekly currency positions in Norway and the U.S.