EconStor >
Institut für Weltwirtschaft (IfW), Kiel >
Kieler Arbeitspapiere, IfW >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/64828
  
Title:Financial intermediation and the role of price discrimination in a two-tier market PDF Logo
Authors:Reitz, Stefan
Schmidt, Markus A.
Taylor, Mark P.
Issue Date:2012
Series/Report no.:Kiel Working Paper 1794
Abstract:Though unambiguously outperforming all other financial markets in terms of liquidity, foreign exchange trading is still performed in opaque and decentralized markets. In particular, 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 provide a theoretical foreign exchange pricing model that accounts for market power considerations and analyze a database of the trades of a German market maker and his cross section of end-user customers. We find that the market maker generally exerts low bargaining power vis-á-vis his 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. From this perspective, it appears that market makers provide interdealer market liquidity to end-user customers with cross-sectionally differing spreads.
Subjects:foreign exchange
market microstructure
pricing behavior
JEL:F31
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW
Kieler Arbeitspapiere, IfW

Files in This Item:
File Description SizeFormat
726717592.pdf357.22 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/64828

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.