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.