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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
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 | ||||||||||
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| 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: |
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| 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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