An Over‐the‐counter Approach to the Forex Market

Geromichalos, Athanasios; Jung, Kuk Mo

doi:10.1111/iere.12290

Cited by 21 publications

(12 citation statements)

References 48 publications

(44 reference statements)

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“…There is a small but growing literature that has applied settings with search frictions to questions in international economics. Papers which study the endogenous determination of real exchange rates in a setting with search frictions include Head and Shi (2003), Geromichalos and Simonovska (2014), and Geromichalos and Jung (2015). Shi (2006) discusses currency unions in a monetary search setting, and Devereux and Shi (2013) and Zhang (2014) study the emergence and stability of international reserve currencies.…”

Section: A Related Literaturementioning

confidence: 99%

An Open‐economy Model With Money, Endogenous Search, and Heterogeneous Firms

Herrenbrueck

2017

Economic Inquiry

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This paper describes a new monetary open‐economy model where firms have market power due to search frictions in the goods market, and endogenous search effort by consumers mitigates this market power. The optimal inflation rate generally depends positively on the cost of search effort, the cost of firm entry, and the cost of trade. Higher inflation always improves a country's terms‐of‐trade against its trading partners. I also characterize a general class of matching processes which offer a novel approach to modeling firm sales. (JEL D43, E40, F12)

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Section: A Related Literaturementioning

confidence: 99%

An Open‐economy Model With Money, Endogenous Search, and Heterogeneous Firms

Herrenbrueck

2017

Economic Inquiry

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“…Some other studies focus on rare disasters and crashes; for example, Chernov, Graveline, and Zviadadze () and Farhi and Gabaix (). Last, Geromichalos and Jung () study the exchange rates incorporating the fact of over‐the‐counter FX trading.…”

Section: Related Literaturementioning

confidence: 99%

Liquidity Risk and Time‐varying Correlation Between Equity and Currency Returns

Jung

2016

Economic Inquiry

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Using data on twenty major OECD countries over time, this paper documents a new evidence on real equity and real currency prices: higher real returns in the home equity market relative to foreign counterparts are generally associated with real home currency depreciation at a monthly frequency, but this negative correlation breaks down or even reverses during times of relatively higher aggregate economic uncertainty or volatility. This paper also proposes one plausible explanation for this time-varying correlation structure. The suggested model is based on a long-run risks type model, combined with time-varying liquidity risks in stock markets. With recursive preference for the early resolution of uncertainty and a negative link between the level of short-run economic growth and equity market liquidity volatility, the model demonstrates that severe short-run economic uncertainty overturns the otherwise negative link between the real currency and real relative equity returns.Keywords: foreign exchange rates, long run risks models, liquidity risks JEL Classification Numbers: E43, F31, G12, G15 * Address: Ming Lun Street, Kaifeng, Henan, 475001, China, Phone Number: +86-187-4986-2307, e-mail: kmjung@ucdavis.edu. I am indebted to Paul Bergin for continuous advice and support for this project. I am also grateful to Katheryn Russ and Kevin Salyer for useful comments and suggestions. I would also like to thank participants at Henan University Brownbag seminar for helpful comments. I am especially indebted to William Branch and anonymous referees for help and many valuable suggestions. I also thank Niu Yongqing for excellent research assistance. All errors are mine.

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“…Other recent papers also incorporate secondary asset market trade within a monetary search model. Examples include Geromichalos and Herrenbrueck (2012), Berentsen, Huber, and Marchesiani (2014), Trejos and Wright (2014), Lagos and Zhang (2015), Mattesini and Nosal (2015), and Geromichalos and Jung (2015). Our paper is the first among this literature to introduce OTC market entry decisions and to study how inflation can affect these decisions and, consequently, welfare.…”

Section: Introductionmentioning

confidence: 97%

Monetary Policy and Efficiency in Over-the-Counter Financial Trade

Geromichalos

Jung

2016

SSRN Journal

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We develop a monetary model that incorporates Over-the-Counter (OTC) asset trade. After agents have made their money holding decisions, they receive an idiosyncratic shock that affects their valuation for consumption and, hence, for the unique liquid asset, namely, money. Subsequently, agents can choose whether they want to enter the OTC market in order to sell assets and, thus, boost their liquidity, or to buy assets and, thus, provide liquidity to other agents. A unique feature of our model is that inflation affects welfare not only through the traditional channel, i.e., through determining equilibrium real balances, but also through influencing agents' entry decisions in the financial market. We use our framework to study the effect of inflation on welfare, asset prices, and OTC trade volume. In contrast to most monetary models, which predict a negative relationship between inflation and welfare, we find that inflation can be welfare improving within a certain range, because it mitigates a search externality that agents impose on one another when they make their OTC market entry decision.

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An Over‐the‐counter Approach to the Forex Market

Cited by 21 publications

References 48 publications

An Open‐economy Model With Money, Endogenous Search, and Heterogeneous Firms

An Open‐economy Model With Money, Endogenous Search, and Heterogeneous Firms

Liquidity Risk and Time‐varying Correlation Between Equity and Currency Returns

Monetary Policy and Efficiency in Over-the-Counter Financial Trade

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