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A Unifying Microstructure Framework for Modeling Intraday and Interday Asset Pricing Dynamics: the Case of Exchange Rates
Author(s) -
Chauveau Thierry,
Topol Richard
Publication year - 1999
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00099
Subject(s) - random walk , heteroscedasticity , exchange rate , econometrics , asset (computer security) , variance (accounting) , economics , conditional variance , continuous time random walk , monetary economics , autoregressive conditional heteroskedasticity , mathematics , computer science , statistics , volatility (finance) , computer security , accounting
A model of the dynamics of intradaily exchange rates is presented. The current Over‐The‐Counter (OTC) exchange rate is the quote of the quoting bank.Two polar cases are considered: (i) If each bank is able to observe the noises relative to the orders of its own clients, then the OTC exchange rate is shown to obey a random walk with a constant conditional variance. (ii) If each bank is not able to observe the noises relative to the orders of its own clients, the OTC exchange rate is no more a random walk and conditional heteroskedasticity appears.