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Dagfinn Rime

Bi Norwegian Business School, Finance, Faculty Member

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My primary research interests are in international finance, in particular the microstructure of foreign exchange markets. Before moving to BI I worked for the Norges Bank (Central bank of Norway), doing research and giving support to the Market Operation Department. I currently hold a part-time position with Norges Bank.

My papers have been published in journals like Journal of Financial Economics, Journal of Monetary Economics, Journal of International Economics, Journal of Banking and Finance and Journal of International Money and Finance.

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Papers by Dagfinn Rime

The Microstructure of Foreign Exchange Markets

Southern Economic Journal, 1997

Working papers fra Norges Bank, fra 1992/1 til 2009/2 kan bestilles over e-post: FacilityServices... more Working papers fra Norges Bank, fra 1992/1 til 2009/2 kan bestilles over e-post: [email protected] Fra 1999 og senere er publikasjonene tilgjengelige på www.norges-bank.no Working papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin endelige form. Hensikten er blant annet at forfatteren kan motta kommentarer fra kolleger og andre interesserte. Synspunkter og konklusjoner i arbeidene står for forfatternes regning.

Volume, Order Flow and the FX market: Does it matter who you are?

We study the impact of order flow and volume using an unique data set of daily trading in the Swe... more We study the impact of order flow and volume using an unique data set of daily trading in the Swedish krona (SEK) market. The data set covers 95 per cent of worldwide SEK-trading, and is disag- gregated on 13 reporting banks' buying and selling with seven dierent counterparties in five dierent instruments. The preliminary sample covers the first six months

Dealer Behavior and Trading Systems in Foreign Exchange Markets

We study dealer behavior in the foreign exchange spot market using a detailed data set on the com... more We study dealer behavior in the foreign exchange spot market using a detailed data set on the complete transactions of four dealers. There is strong support for an information effect in incoming trades. Although there is evidence that the information effect increases with trade size in direct bilateral trades, the direction of a trade seems to be more important. The

What can financial economics teach us about exchange rates?

The anatomy of the global FX market through the lens of the 2013 Triennial Survey

Trading in Foreign Exchange Markets: Four Essays on the Microstructure of Foreign Exchange

FLOWS OF THE PACIFIC: ASIAN FOREIGN EXCHANGE MARKETS THROUGH TRANQUILITY AND TURBULENCE

Using the longest data set on FX order flow to date, along with the broadest coverage of currenci... more Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for eleven Asian and Australasian currencies, we find that order flow has a potentially strong impact on all exchange rates in the sample. The effect is strongest on floating exchange rates, both economically and statistically, but is sizeable also on the other exchange rates, especially during periods of turbulence. By creating a measure of regional order flow, we show that all exchange rates depreciate as flows are moved out of Asia/Australasia and into US dollars. This is true both across regimes and if their own flow is not included in the structure of the regional flow.

Large' vs. 'Small' Players: A Closer Look at the Dynamics of Speculative Attacks

SSRN Electronic Journal, 2000

What is the role of "large players" like hedge funds and other highly leveraged institutions in s... more What is the role of "large players" like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are in the rear. We propose a model that allows both the large player to move early in order to induce speculation by small players, or wait so as to benefit from a high interest rate prior to the attack. Using data on net positions of "large" (foreigners) and "small" (locals) players, we find that large players moved last in three attacks on the Norwegian krone (nok) during the 1990s: The erm-crisis of 1992, the nok-pressure in 1997, and after the Russian moratorium in 1998. In 1998 there was a contemporaneous attack on the Swedish krona (sek) in which large players moved early. Interest rates did not increase in Sweden so there was little to gain by a delayed attack. JEL Classifications: F31, F41, G15

Exchange rate volatility and the mixture of distribution hypothesis

Empirical Economics, 2006

This paper sheds new light on the mixture of distribution hypothesis by means of a study of the w... more This paper sheds new light on the mixture of distribution hypothesis by means of a study of the weekly exchange rate volatility of the Norwegian krone. In line with other studies we find that the impact of information arrival on exchange rate volatility is positive and statistically significant, and that the hypothesis that an increase in the number of traders reduces exchange rate volatility is not supported. The novelties of our study consist in documenting that the positive impact of information arrival on volatility is relatively stable across three different exchange rate regimes, and in that the impact is relatively similar for both weekly volatility and weekly realised volatility. It is not given that the former should be the case since exchange rate stabilisation was actively pursued by the central bank in parts of the study period. We also report a case in which undesirable residual properties attained within traditional frameworks are easily removed by applying the log-transformation on volatilities.

The $4 trillion question: what explains FX growth since the 2007 survey?

Daily average foreign exchange market turnover reached $4 trillion in April 2010April , 20% highe... more Daily average foreign exchange market turnover reached $4 trillion in April 2010April , 20% higher than in 2007. Growth owed largely to the increased trading activity of "other financial institutions", which contributed 85% of the higher turnover. Within this customer category, the growth is driven by high-frequency traders, banks trading as clients of the biggest dealers, and online trading by retail investors. Electronic trading has been instrumental to this increase, particularly algorithmic trading. JEL Classification: F31, G12, G15, C42, C82. Algorithmic trading: Automated transactions where a computer algorithm decides the ordersubmission strategy. See also: High-frequency trading.

U.S. Exchange Rates and Currency Flows

SSRN Electronic Journal, 2000

After the Meese & Rogoff 1983-results, researchers have searched with torch for macroeconomic var... more After the Meese & Rogoff 1983-results, researchers have searched with torch for macroeconomic variables with predictive power on horizons shorter than 6 months. Recently, several papers have showed that order flows influence exchange rates intradaily. Maybe order flow may be of importance also for lower frequencies than intraday, like the weekly frequency? In this paper I test a trading model where order flow may be informative due to the existence of private information, and where there are important macroeconomic public information as well. Using weekly data for spot and options trading in the U.S., the model is tested for five exchange rates against US Dollar. For three of the exchange rates, DEM/USD, GBP/USD and CHF/USD, I find that order flow is an important variable for explaining weekly changes in exchange rates. The coefficients are both statistically and economically significant, and have intuitive sign. When U.S banks sell foreign currency, the foreign currency depreciates.

Private or Public Information in Foreign Exchange Markets? An Empirical Analysis

In macroeconomic models exchange rates are determined by public information. Trading activities a... more In macroeconomic models exchange rates are determined by public information. Trading activities are completely irrelevant. In general, these models have low explanatory power for short horizons, which might be due to the possible existence of private information. Dealers in the foreign exchange market consider the order flow from customers to be the most important source of private information. I test a microstructural trading model incorporating private information, including both order flow and macroeconomic variables. The results show that order flow is an important variable for explaining weekly changes in exchange rates, thereby indicating an important role for private information. The strongest effect comes from customer order flow, which highlights the fundamental role of customer demand.

Dealer behavior and trading systems in foreign exchange markets

Journal of Financial Economics, 2005

The introduction of electronic broker systems in the foreign exchange (FX) market at the end of 1... more The introduction of electronic broker systems in the foreign exchange (FX) market at the end of 1992 changed the structure of the market and opened new channels for trading. We study the impact of these systems on dealer behavior, using a unique data set on the complete transactions of four FX dealers. We find some support for an information effect in incoming trades conducted directly (bilaterally). For trades executed by electronic broker systems we find no information effects, but we find that sequences of trades in cumulative flow may be infomative for prices. The new electronic systems have changed how dealers control their inventories by introducing new channels for this purpose. Dealers use outgoing trades on electronic brokers to control inventory. Comparing our results to previous research indicates that the introduction of electronic brokers have changed the behavior of dealers. for helpful comments, and Richard Lyons for stimulating discussions. Any errors are entirely our own. Updated versions can be downloaded from Dagfinn Rimes homepage at

FLOWS OF THE PACIFIC: ASIAN FOREIGN EXCHANGE MARKETS THROUGH TRANQUILITY AND TURBULENCE

Pacific Economic Review, 2012

Using the longest data set on FX order flow to date, along with the broadest coverage of currenci... more Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for eleven Asian and Australasian currencies, we find that order flow has a potentially strong impact on all exchange rates in the sample. The effect is strongest on floating exchange rates, both economically and statistically, but is sizeable also on the other exchange rates, especially during periods of turbulence. By creating a measure of regional order flow, we show that all exchange rates depreciate as flows are moved out of Asia/Australasia and into US dollars. This is true both across regimes and if their own flow is not included in the structure of the regional flow.

The Offshore Renminbi Exchange Rate: Microstructure and Links to the Onshore Market

SSRN Electronic Journal, 2000

The offshore renminbi (CNH) exchange rate is the exchange rate of the Chinese currency transacted... more The offshore renminbi (CNH) exchange rate is the exchange rate of the Chinese currency transacted outside China. We study the CNH exchange rate dynamics and its links with onshore exchange rates. Using a specialized microstructure dataset, we find that CNH is significantly affected by its order flow and limit-order imbalance. The offshore CNH exchange rate has an increasing impact on the onshore rate, and significant predictive power for the official RMB central parity rate. The CNH order flow also affects the onshore RMB exchange rate and the central parity rate. The interactions between variables are likely to be time-varying. JEL Codes: F31, F33, G14, G15, G21, G28

Customer trading and information in foreign exchange markets

Recent research point to the possible existence of private information in foreign exchange market... more Recent research point to the possible existence of private information in foreign exchange markets. Dealers claim that customer orders are their most important source of private information, and that banks with a large customer base have a competitive advantage. In this paper we test hypotheses on effects of private information using observations on customer trades, and the identity of the counterparties the dealers trade with. We find that customer trades influence the trading decision. Neither customer trades nor counterparty identity affect pricing decisions. Dealers do not price discriminate between dealers, but they do price discriminate customers. Spreads to customers are wider than to other dealers.

New electronic trading systems in foreign exchange markets

Arbitrage in the foreign exchange market: Turning on the microscope

Journal of International Economics, 2008

This paper provides real-time evidence on the frequency, size, duration and economic significance... more This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency. The analysis unveils

Sommario non tecnico

Herding the Scapegoats: Foreign Exchange Order Flow and the Time-Varying Effect of Fundamentals

The Microstructure of Foreign Exchange Markets

Southern Economic Journal, 1997

Working papers fra Norges Bank, fra 1992/1 til 2009/2 kan bestilles over e-post: FacilityServices... more Working papers fra Norges Bank, fra 1992/1 til 2009/2 kan bestilles over e-post: [email protected] Fra 1999 og senere er publikasjonene tilgjengelige på www.norges-bank.no Working papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin endelige form. Hensikten er blant annet at forfatteren kan motta kommentarer fra kolleger og andre interesserte. Synspunkter og konklusjoner i arbeidene står for forfatternes regning.

Volume, Order Flow and the FX market: Does it matter who you are?

We study the impact of order flow and volume using an unique data set of daily trading in the Swe... more We study the impact of order flow and volume using an unique data set of daily trading in the Swedish krona (SEK) market. The data set covers 95 per cent of worldwide SEK-trading, and is disag- gregated on 13 reporting banks' buying and selling with seven dierent counterparties in five dierent instruments. The preliminary sample covers the first six months

Dealer Behavior and Trading Systems in Foreign Exchange Markets

We study dealer behavior in the foreign exchange spot market using a detailed data set on the com... more We study dealer behavior in the foreign exchange spot market using a detailed data set on the complete transactions of four dealers. There is strong support for an information effect in incoming trades. Although there is evidence that the information effect increases with trade size in direct bilateral trades, the direction of a trade seems to be more important. The

What can financial economics teach us about exchange rates?

The anatomy of the global FX market through the lens of the 2013 Triennial Survey

Trading in Foreign Exchange Markets: Four Essays on the Microstructure of Foreign Exchange

FLOWS OF THE PACIFIC: ASIAN FOREIGN EXCHANGE MARKETS THROUGH TRANQUILITY AND TURBULENCE

Using the longest data set on FX order flow to date, along with the broadest coverage of currenci... more Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for eleven Asian and Australasian currencies, we find that order flow has a potentially strong impact on all exchange rates in the sample. The effect is strongest on floating exchange rates, both economically and statistically, but is sizeable also on the other exchange rates, especially during periods of turbulence. By creating a measure of regional order flow, we show that all exchange rates depreciate as flows are moved out of Asia/Australasia and into US dollars. This is true both across regimes and if their own flow is not included in the structure of the regional flow.

Large' vs. 'Small' Players: A Closer Look at the Dynamics of Speculative Attacks

SSRN Electronic Journal, 2000

What is the role of "large players" like hedge funds and other highly leveraged institutions in s... more What is the role of "large players" like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are in the rear. We propose a model that allows both the large player to move early in order to induce speculation by small players, or wait so as to benefit from a high interest rate prior to the attack. Using data on net positions of "large" (foreigners) and "small" (locals) players, we find that large players moved last in three attacks on the Norwegian krone (nok) during the 1990s: The erm-crisis of 1992, the nok-pressure in 1997, and after the Russian moratorium in 1998. In 1998 there was a contemporaneous attack on the Swedish krona (sek) in which large players moved early. Interest rates did not increase in Sweden so there was little to gain by a delayed attack. JEL Classifications: F31, F41, G15

Exchange rate volatility and the mixture of distribution hypothesis

Empirical Economics, 2006

This paper sheds new light on the mixture of distribution hypothesis by means of a study of the w... more This paper sheds new light on the mixture of distribution hypothesis by means of a study of the weekly exchange rate volatility of the Norwegian krone. In line with other studies we find that the impact of information arrival on exchange rate volatility is positive and statistically significant, and that the hypothesis that an increase in the number of traders reduces exchange rate volatility is not supported. The novelties of our study consist in documenting that the positive impact of information arrival on volatility is relatively stable across three different exchange rate regimes, and in that the impact is relatively similar for both weekly volatility and weekly realised volatility. It is not given that the former should be the case since exchange rate stabilisation was actively pursued by the central bank in parts of the study period. We also report a case in which undesirable residual properties attained within traditional frameworks are easily removed by applying the log-transformation on volatilities.

The $4 trillion question: what explains FX growth since the 2007 survey?

Daily average foreign exchange market turnover reached $4 trillion in April 2010April , 20% highe... more Daily average foreign exchange market turnover reached $4 trillion in April 2010April , 20% higher than in 2007. Growth owed largely to the increased trading activity of "other financial institutions", which contributed 85% of the higher turnover. Within this customer category, the growth is driven by high-frequency traders, banks trading as clients of the biggest dealers, and online trading by retail investors. Electronic trading has been instrumental to this increase, particularly algorithmic trading. JEL Classification: F31, G12, G15, C42, C82. Algorithmic trading: Automated transactions where a computer algorithm decides the ordersubmission strategy. See also: High-frequency trading.

U.S. Exchange Rates and Currency Flows

SSRN Electronic Journal, 2000

After the Meese & Rogoff 1983-results, researchers have searched with torch for macroeconomic var... more After the Meese & Rogoff 1983-results, researchers have searched with torch for macroeconomic variables with predictive power on horizons shorter than 6 months. Recently, several papers have showed that order flows influence exchange rates intradaily. Maybe order flow may be of importance also for lower frequencies than intraday, like the weekly frequency? In this paper I test a trading model where order flow may be informative due to the existence of private information, and where there are important macroeconomic public information as well. Using weekly data for spot and options trading in the U.S., the model is tested for five exchange rates against US Dollar. For three of the exchange rates, DEM/USD, GBP/USD and CHF/USD, I find that order flow is an important variable for explaining weekly changes in exchange rates. The coefficients are both statistically and economically significant, and have intuitive sign. When U.S banks sell foreign currency, the foreign currency depreciates.

Private or Public Information in Foreign Exchange Markets? An Empirical Analysis

In macroeconomic models exchange rates are determined by public information. Trading activities a... more In macroeconomic models exchange rates are determined by public information. Trading activities are completely irrelevant. In general, these models have low explanatory power for short horizons, which might be due to the possible existence of private information. Dealers in the foreign exchange market consider the order flow from customers to be the most important source of private information. I test a microstructural trading model incorporating private information, including both order flow and macroeconomic variables. The results show that order flow is an important variable for explaining weekly changes in exchange rates, thereby indicating an important role for private information. The strongest effect comes from customer order flow, which highlights the fundamental role of customer demand.

Dealer behavior and trading systems in foreign exchange markets

Journal of Financial Economics, 2005

The introduction of electronic broker systems in the foreign exchange (FX) market at the end of 1... more The introduction of electronic broker systems in the foreign exchange (FX) market at the end of 1992 changed the structure of the market and opened new channels for trading. We study the impact of these systems on dealer behavior, using a unique data set on the complete transactions of four FX dealers. We find some support for an information effect in incoming trades conducted directly (bilaterally). For trades executed by electronic broker systems we find no information effects, but we find that sequences of trades in cumulative flow may be infomative for prices. The new electronic systems have changed how dealers control their inventories by introducing new channels for this purpose. Dealers use outgoing trades on electronic brokers to control inventory. Comparing our results to previous research indicates that the introduction of electronic brokers have changed the behavior of dealers. for helpful comments, and Richard Lyons for stimulating discussions. Any errors are entirely our own. Updated versions can be downloaded from Dagfinn Rimes homepage at

FLOWS OF THE PACIFIC: ASIAN FOREIGN EXCHANGE MARKETS THROUGH TRANQUILITY AND TURBULENCE

Pacific Economic Review, 2012

Using the longest data set on FX order flow to date, along with the broadest coverage of currenci... more Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for eleven Asian and Australasian currencies, we find that order flow has a potentially strong impact on all exchange rates in the sample. The effect is strongest on floating exchange rates, both economically and statistically, but is sizeable also on the other exchange rates, especially during periods of turbulence. By creating a measure of regional order flow, we show that all exchange rates depreciate as flows are moved out of Asia/Australasia and into US dollars. This is true both across regimes and if their own flow is not included in the structure of the regional flow.

The Offshore Renminbi Exchange Rate: Microstructure and Links to the Onshore Market

SSRN Electronic Journal, 2000

The offshore renminbi (CNH) exchange rate is the exchange rate of the Chinese currency transacted... more The offshore renminbi (CNH) exchange rate is the exchange rate of the Chinese currency transacted outside China. We study the CNH exchange rate dynamics and its links with onshore exchange rates. Using a specialized microstructure dataset, we find that CNH is significantly affected by its order flow and limit-order imbalance. The offshore CNH exchange rate has an increasing impact on the onshore rate, and significant predictive power for the official RMB central parity rate. The CNH order flow also affects the onshore RMB exchange rate and the central parity rate. The interactions between variables are likely to be time-varying. JEL Codes: F31, F33, G14, G15, G21, G28

Customer trading and information in foreign exchange markets

Recent research point to the possible existence of private information in foreign exchange market... more Recent research point to the possible existence of private information in foreign exchange markets. Dealers claim that customer orders are their most important source of private information, and that banks with a large customer base have a competitive advantage. In this paper we test hypotheses on effects of private information using observations on customer trades, and the identity of the counterparties the dealers trade with. We find that customer trades influence the trading decision. Neither customer trades nor counterparty identity affect pricing decisions. Dealers do not price discriminate between dealers, but they do price discriminate customers. Spreads to customers are wider than to other dealers.

New electronic trading systems in foreign exchange markets

Arbitrage in the foreign exchange market: Turning on the microscope

Journal of International Economics, 2008

This paper provides real-time evidence on the frequency, size, duration and economic significance... more This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency. The analysis unveils

Sommario non tecnico

Herding the Scapegoats: Foreign Exchange Order Flow and the Time-Varying Effect of Fundamentals