The Information Content of Individual FX Dealers’ Quoting Activity∗

We investigate the information content of dealers’ quoting activity as measured by the frequency of price revisions in the Euro/Dollar foreign exchange market. We use the multivariate double autoregressive conditional Poisson model designed for time series of count data. We find that dealers react differently to the same news announcements, some dealers increasing their activity, whilst others decrease it in response to the same news. We attribute this to the heterogeneous interpretation of the news content by individual traders and to the significant influence of some dealers on others. We also find very significant interaction between dealers’ quoting activity, which suggests that dealers monitor the quoting activity of others to infer their private information and their interpretation of public news announcements. K eywords: Foreign Exchange, Market Microstructure, Time Series, Count Data. JEL Classification codes: F31, G15, C35. ∗The authors would like to thank Nihat Aktas, Luc Bauwens, Tanguy Delaunois, Rob Engle, Clive Granger, Bruce Lehmann, Laurence Lescourret, Burkart Monch, Hervé Van Oppens and participants at the microstructure sessions in the 21 AFFI International Conference (France), the European Financial Management Association, EFMA 2004 meeting in Basel (Switzerland) and the Econometric Society European Meeting 2005 in Madrid, for helpful discussions and suggestions. This work is supported in part by the European Community Human Potential Programme under contract HPRN-CT-2002-00232, Microstructure of Financial Markets in Europe. The usual disclaimers apply. Department of Business Administration (IAG), Finance Unit, Catholic University of Louvain, Place des Doyens 1, 1348 Louvain-la-Neuve, Belgium, e-mail: [email protected]. Department of Statistics and Econometrics, University Carlos III, Calle de Madrid 126, Getafe 28903 (Madrid), Spain, e-mail: [email protected]