Auction-based tests of inventory control and private information in a centralized interdealer FX market
This study examines Colombian FX auctions, evaluating inventory control and private information effects on trading prices using RD designs.
What it examines
This study uses FX auctions by the Central Bank of Colombia to investigate how dealers manage inventory and whether they use private information when trading. It employs a regression discontinuity design to analyze interdealer market trades before and after auctions, revealing how auction outcomes affect trading prices and volumes.
What it concludes
The study finds clear inventory effects, with dealers paying higher prices after selling USD, and no evidence of extracting private information. Its applications include improving FX market design, guiding central bank interventions, and understanding dealer behavior. Future research should further explore market structure and information dynamics.
Evidence objects
A study on the Colombian foreign exchange market reveals that dealers winning central bank auctions suffer inventory effects, repurchasing dollars at elevated interdealer prices to rebuild stocks, exposing unexpected costs.
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Innovatively employing sharp and fuzzy regression discontinuity designs, the research isolates exogenous inventory changes and tests private information by comparing extreme bidders, introducing new terminologies for inventory effects with rigor.
key_findings bullet 2 · key_findings · validation V0
Surprisingly, the study finds no evidence that auction outcomes update dealers beliefs on currency value, implying market transparency limits private learning, despite detailed Central Bank data and robust methodological approaches.
key_findings bullet 3 · key_findings · validation V0
Investigating auction-based methodologies, the paper pioneers the application of $auction$ techniques to evaluate inventory control and private information in $FX$ markets. Its originality lies in adapting quantitative methods to reveal market microstructure and information asymmetries. Novel insights into dealer bid revisions significantly advance understanding, making this study compelling for researchers.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
This study examines how inventory control and private information affect trading prices and volumes in a centralized interdealer foreign exchange (FX) market. Using exogenous variation from FX auctions conducted by the Colombian Central Bank (2008–2014), we analyze settlement data from the COP/USD spot market before and after each auction. Comparing dealers with differing inventory and information shocks, we find that those with reduced inventories increase net USD purchases and pay higher prices post-auction.
Source row: 265 · abstract type: unknown