Speculator Identification: A Microstructure Approach
Ben Z. Schreiber
Information and Statistics, Bank of Israel, Jerusalem, Israel

Speculators usually provide FX markets with liquidity and sophistication. Many economies, however, suffer from speculator activity such as 'carry trade' or 'hot money'. Thus, it is in the interests of the monetary authorities to identify and track speculators. This paper suggests a methodology for identifying speculators in FX markets by examining both the speculative characteristics of all the players and the extent of the relations among the players' net purchases and market variables. A player is identified as a speculator if both examinations are affirmative. Implementing the proposed methodology on Israel's FX market, which includes 660 large players, enabled us to identify 55 speculators - 40 of them nonresident entities and 15 local financial companies. Examinig their activity around 'outlying days' revealed that their behavior was different from other large players. Moreover, it was found that before outlying depreciation days, speculators purchased FX while before outlying appreciation days, they sold FX. This means that during the sample period, speculators joined or initiated the trend before the oulying depreciation or appreciation days.

Keywords: Microstructure; Foreign exchange markets; Asymmetric information; Speculation

Biography: Head of Methodology and Economics unit, Bank of Israel and a lecturer at Bar-Ilan University.

Married + 3

Areas of interest: International finance, Banking, Methodological issues

Hobbies: Yoga, Music, Philosophy