| Item Type |
Conference or Workshop Item
(Paper)
|
| Abstract |
Over 85% of all foreign exchange (FX) transactions involve the US dollar. I argue that the US dollar dominates FX trading volume because of strategic avoidance of price impact. To show this, I leverage the fact that non-dollar currency pairs can be traded indirectly by using the US dollar as an intermediate vehicle currency. I present a model of FX trading that embraces this idea and derive a set of sufficient conditions for dollar dominance. I then empirically test these conditions using a globally representative FX trade data set and provide evidence that is consistent with my model. To establish causality, I employ a systematic approach to identify quasi-exogenous spikes in the sufficient conditions. Lastly, I use non-overlapping holidays as a novel identification tool to show that up to 36-40% of the daily volume in dollar currency pairs are due to vehicle currency trading. |
| Authors |
Somogyi, Fabricius |
| Language |
English |
| Subjects |
economics
finance |
| HSG Classification |
contribution to scientific community |
| HSG Profile Area |
SOF - System-wide Risk in the Financial System |
| Date |
October 2021 |
| Event Title |
27th Annual Meeting of the German Finance Association (DGF) |
| Event Location |
Innsbruck |
| Event Dates |
01 Oktober 2021 |
| Depositing User |
Fabricius Somogyi
|
| Date Deposited |
14 Oct 2021 15:11 |
| Last Modified |
20 Jul 2022 17:46 |
| URI: |
https://www.alexandria.unisg.ch/publications/264589 |
Dollar Dominance in FX Trading
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