Suchergebnisse

This paper contributes to the microstructure approach to exchange rates in two ways. Using a unique dataset that covers 100% of the Brazilian FX financial market, we find a strict link between FX currency flows and the Balance of Payments. Second, we develop an identification strategy that allows us to properly estimate the behavior of each of the main players in the FX market: dealers and the premium they charge in order to provide overnight liquidity; customers and the stabilizing nature of their feedback trading; and y the central bank and the liquidity provision and leaning-against-the-wind behavior in its intervention function.

This paper analyses one of the main pillars of Brazil.s newly found economic resilience: a maturing FX market providing support to its managed .oating exchange rate regime. I develop a microstrucure model suitable to describe the Brazilian FX market, an emerging economy frequently subjected to sudden stops in capital .ows. The model introduces two major changes relative to previous microstructure models. First, dealers may decide to hold overnight positions in the FX market if they .nd it pro.table to do so. Second, customers. demand for foreign exchange is a function of macroeconomic fundamentals, including contemporaneous feedback from exchange rate movements. The main predictions of the model are supported by a unique data set, covering all transactions between dealers and customers from the o¢ cial Brazilian FX market from July 1, 1999 to June 30, 2003 (a time period in which Brazil su¤ered two severe external liquidity shocks).

Abstract This paper shows that imperfect financial integration and informational asymmetries are not competing theories but rather complementary ideas to a single explanation of the home bias puzzle. We develop a rational expectations model of asset prices with investors that face informational constraints and find that informational advantages arise endogenously as a response to small financial frictions. We also present empirical evidence that (i) international financial frictions are correlated to observed patterns of US investors' attention and that (ii) the attention US investors allocate to foreign stocks helps explain home bias towards those countries, even after controlling for financial integration levels.