Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

The exchange rate game

08.06.2006


What actually happens when the rate for the US dollar goes up or down by one krone in the course of a year?, asks Geir Høidal Bjønnes, associate professor at BI Norwegian School of Management.



This is a puzzle in which economists world-wide are constantly searching for the missing pieces and where macroeconomic models are of no assistance.

However what if, instead of looking at macroeconomic conditions, we study the players in this game, the large banks’ foreign exchange dealers? Can we learn more about the movements of the exchange rate by following the dealers in action? What drives currency markets? What causes rates to move up or down?


These were the first questions asked by associate professor Geir Høidal Bjønnes from BI and his fellow researcher Dagfinn Rime from Norges Bank when they sat down beside the foreign exchange dealers in one of the Nordic countries’ largest banks authorised to deal in foreign exchange. The results of their research have been reproduced in the international publication Journal of Financial Economics.

“We sat next to the foreign exchange dealers for a whole week and learned a great deal about how the market works in practice. The dealers have an incredible capacity for picking up information and a unique ability to act immediately on the basis of something they have just learned,” says Bjønnes.

The dealers were very willing to explain what was needed to succeed in the currency market and how to make sure you won more often than you lost when dealing in dollars, yen, euros, Swiss francs, kroner and other currencies. Over a burger and something to wash it down at the Aker Brygge Beach Club in Oslo, practitioners and researchers got to grips with what was involved. “It was astonishing how well our theoretical models matched with reality. There was almost 100 per cent agreement between them and the dealers’ descriptions of how they thought and what they based their trading on.”

But finance is finance, and research in this field is based on hard facts, precise models and figures by the bucket load. The researchers collected all the relevant data about the individual transactions performed during their observation period and this unique set of data was then tested in relation to different theories on how exchange rates develop. The two researchers were rewarded for their efforts and think they have found another piece of the foreign exchange movement puzzle.

“We now understand more about how exchange rates change,” says Bjønnes, who can provide documentation from the study showing that the information the exchange dealer picks up actually does contribute to explaining how the exchange rate moves. This information can be anything from macro figures such as new American import and export figures to everything under the sun that they pick up when talking to customers or other dealers.

“The deal itself passes on information,” explains Bjønnes. “If a customer wants to change a billion Norwegian kroner into euros, just conducting the deal will have an effect on the exchange rate.” A subsequent study has shown that what drives exchange rates first and foremost is the financial players in the market.

What can all this be used for?

“Understanding more about the movements of the foreign exchange market is valuable in itself. We want to learn more about how expectations feed exchange rates by combining knowledge about how players in the market operate (micro) with macroeconomic conditions. This has relevance for the banks who are sitting on private information about their own dealings. They can use information about their dealings for different purposes. In addition, it is important to understand what drives exchange rates, and it is here that the link to macro is important. “

Excellent research

• Geir Høidal Bjønnes (with Dagfinn Rime) published an article entitled “Dealer behaviour and trading systems in foreign exchange markets” in the Journal of Financial Economics in 2005.

• The Journal of Financial Economics is one of the world’s most respected publications in its field.

• BI’s academic environment in finance was reckoned by the journal Financial Management as one of the best in Europe, and second only to the London Business School.

Geir H. Bjonnes | alfa
Further information:
http://www.bi.no/templates/NyhetsArtikkel____39170.aspx

More articles from Business and Finance:

nachricht Preferential trade agreements enhance global trade at the expense of its resilience
17.02.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Breakthrough with a chain of gold atoms

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

Im Focus: DNA repair: a new letter in the cell alphabet

Results reveal how discoveries may be hidden in scientific “blind spots”

Cells need to repair damaged DNA in our genes to prevent the development of cancer and other diseases. Our cells therefore activate and send “repair-proteins”...

Im Focus: Dresdner scientists print tomorrow’s world

The Fraunhofer IWS Dresden and Technische Universität Dresden inaugurated their jointly operated Center for Additive Manufacturing Dresden (AMCD) with a festive ceremony on February 7, 2017. Scientists from various disciplines perform research on materials, additive manufacturing processes and innovative technologies, which build up components in a layer by layer process. This technology opens up new horizons for component design and combinations of functions. For example during fabrication, electrical conductors and sensors are already able to be additively manufactured into components. They provide information about stress conditions of a product during operation.

The 3D-printing technology, or additive manufacturing as it is often called, has long made the step out of scientific research laboratories into industrial...

Im Focus: Mimicking nature's cellular architectures via 3-D printing

Research offers new level of control over the structure of 3-D printed materials

Nature does amazing things with limited design materials. Grass, for example, can support its own weight, resist strong wind loads, and recover after being...

Im Focus: Three Magnetic States for Each Hole

Nanometer-scale magnetic perforated grids could create new possibilities for computing. Together with international colleagues, scientists from the Helmholtz Zentrum Dresden-Rossendorf (HZDR) have shown how a cobalt grid can be reliably programmed at room temperature. In addition they discovered that for every hole ("antidot") three magnetic states can be configured. The results have been published in the journal "Scientific Reports".

Physicist Dr. Rantej Bali from the HZDR, together with scientists from Singapore and Australia, designed a special grid structure in a thin layer of cobalt in...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Booth and panel discussion – The Lindau Nobel Laureate Meetings at the AAAS 2017 Annual Meeting

13.02.2017 | Event News

Complex Loading versus Hidden Reserves

10.02.2017 | Event News

International Conference on Crystal Growth in Freiburg

09.02.2017 | Event News

 
Latest News

From rocks in Colorado, evidence of a 'chaotic solar system'

23.02.2017 | Physics and Astronomy

'Quartz' crystals at the Earth's core power its magnetic field

23.02.2017 | Earth Sciences

Antimicrobial substances identified in Komodo dragon blood

23.02.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>