Institute of Financial Econometrics and Engineering Academic Lecture No.9 Search Frictions in Over-the-Counter Foreign Exchange Markets: Theory and Evidence
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Assistant Prof.LU Dong from School of Finance and Economics, Renmin University of China gave a lecture entitled "Search Frictions in Over-the-Counter Foreign Exchange Markets: Theory and Evidence".

Abstract:Over-the-counter (OTC) markets dominate trading in many asset classes, including foreign exchange (FX). This paper examines how search frictions in the trading process affect the performance of OTC FX markets. Using a unique transaction-level dataset covering the entire market for China’s interbank FX spot trading, we first document several empirical patterns in intraday trades and prices that suggest the presence of search frictions. We then construct a dynamic search model with heterogeneous investors which reproduces the main patterns observed in the data. We calibrate the model and quantify the effects of search frictions on liquidity, price volatility and welfare.