The intraday price discovery of Taiwan’s dual-trading foreign exchange market

Authors: FDar-Hsin Chen, Ying-Hsin Lee

Journal:Corporate Management Review. Dec. 2016, 36(2): 1-29.

Keywords: Cointegration, Vector error correction model, Foreign exchange market, Price discovery

Abstract:
This paper examines the role of price discovery in Taiwan’s two foreign exchange markets during trading days. The minor market, Cosmos Foreign Exchange International Co., has small optimal trading timing, but has a greater mean saving for liquidity dealers. The major market, Taipei Foreign Exchange Co., contributes more information for transaction price discovery, especially during the market opening and closing periods. However, the minor market dominants price discovery for the bid price, because it has the lowest cost in dealing. The causality is bidirectional between the two markets for transaction price, ask price, and spread, but unidirectional for the bid price. Finally, using high-frequency data is essential for detecting price discovery in the spot foreign exchange market, which is especially valid as larger discrepancies of transaction prices between the two markets disappear.