The Microstructure of Currency Markets

Abstract

This article summarizes exchange-rate research using microstructure models. It first lays out the key features of the foreign exchange market and describes how they are incorporated into a canonical model of currency trading. The empirical implications of the model are then examined. The article also discusses how currency trading links spot rate dynamics to macroeconomic conditions, and how this link sheds light on some long standing puzzles concerning the behavior of exchange rates.Currency Trading, Exchange Rates, Exchange Rate Puzzles, Exchange Rate Fundamentals, Foreign Exchange Market, Microstructure, Order Flow, Risk Premium