Price Discovery via Limit Order in FX Market

Abstract

I consider limit order book events that are likely to contribute to price discovery in the foreign exchange market. These events involve transactions and limit orders. The variance decomposition shows that improving order and worsening cancel, these are limit order events, substantially contribute to price discovery. The impact of these on the permanent component of the exchange rate is quantitively equivalent to that of transaction. The implicit profit of transactions at the information event is marginal. I postulate that informed traders select limit order as their optimal strategy when the gain from their possessing information is small.