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Financial intermediation and the role of price discrimination in the foreign exchange market

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Reitz, Stefan, Schmidt, Markus A. and Taylor, Mark P. (2015) Financial intermediation and the role of price discrimination in the foreign exchange market. The European Journal of Finance, 21 (8). pp. 629-645. doi:10.1080/1351847X.2013.830139

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Official URL: http://dx.doi.org/10.1080/1351847X.2013.830139

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Abstract

Foreign exchange trading is performed in opaque and decentralized markets. The two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We develop a theoretical pricing model that accounts for market-power considerations and analyze a database of the trades of a foreign exchange market maker. We find that the market maker generally exerts low bargaining power vis-á-vis customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information.

Item Type: Journal Article
Divisions: Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: The European Journal of Finance
Publisher: Taylor & Francis
ISSN: 1351-847X
Official Date: 2015
Dates:
DateEvent
2015Published
6 November 2014Available
22 May 2013Accepted
15 October 2011Submitted
Volume: 21
Number: 8
Page Range: pp. 629-645
DOI: 10.1080/1351847X.2013.830139
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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