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

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

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: Electron highway inside crystal

Physicists of the University of Würzburg have made an astonishing discovery in a specific type of topological insulators. The effect is due to the structure of the materials used. The researchers have now published their work in the journal Science.

Topological insulators are currently the hot topic in physics according to the newspaper Neue Zürcher Zeitung. Only a few weeks ago, their importance was...

Im Focus: Significantly more productivity in USP lasers

In recent years, lasers with ultrashort pulses (USP) down to the femtosecond range have become established on an industrial scale. They could advance some applications with the much-lauded “cold ablation” – if that meant they would then achieve more throughput. A new generation of process engineering that will address this issue in particular will be discussed at the “4th UKP Workshop – Ultrafast Laser Technology” in April 2017.

Even back in the 1990s, scientists were comparing materials processing with nanosecond, picosecond and femtosesecond pulses. The result was surprising:...

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

Researchers identify potentially druggable mutant p53 proteins that promote cancer growth

09.12.2016 | Life Sciences

Scientists produce a new roadmap for guiding development & conservation in the Amazon

09.12.2016 | Ecology, The Environment and Conservation

Satellites, airport visibility readings shed light on troops' exposure to air pollution

09.12.2016 | Health and Medicine

VideoLinks
B2B-VideoLinks
More VideoLinks >>>