Foreign exchange is the largest financial market in the world. It is also among the least well understood. Much of the academic literature focuses on the dealer-to-client market and assumes banks simply quote prices and wait for clients to trade. The reality is far more complex, leading a trio of researchers to take a stab at designing better models for the market.
“In our two papers, we build models in which market-makers skew their quotes, but they can also unwind in the inter-bank segment of the market. So we have the dealer-to-dealer and the dealer-to-client markets,” says Olivier Guéant, professor of applied mathematics at Université Paris 1 Panthéon-Sorbonne.
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