This paper surveys empirical research in foreign exchange microstructure, a relatively new field focused on the currency market and exchange-rate determination. The survey first describes the institutional structure of the market and the high-frequency behavior of returns, volatility, trading volume, and spreads. It then discusses the influence of order flow on exchange rates and uses the evidence to evaluate three potential explanations for that influence: liquidity effects, inventory effects, and information. Later sections analyze the forces that determine bid-ask spreads and the price discovery process. Since this field is also called “the new microeconomics of exchange rates,” the survey highlights implications of the evidence for modeling short-run exchange-rate dynamics.
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