Price Discovery in the Foreign Currency Futures and Spot Market

In this article, the authors investigate shifts in foreign exchange price discovery between the spot and futures market as these markets evolve. Their evidence suggests that the amount of information revealed through currency futures trading in 1996 is much greater than one would expect based on relative market size. Using data from 2006, the authors obtain quite different results that can potentially be explained by increases in spot market transparency. In particular, the authors find that in their more recent sample the spot market has the dominant information share.