Intraday interest rates are zero. Consequently, a foreign exchange dealer can short a vulnerable currency in the morning, close this position in the afternoon, and never face an interest cost. This tactic might seem especially attractive in times of crisis, since it suggests an immunity to the...

This paper provides a new test for whether different-currency assets are imperfect substitutes. Past work on imperfect substitutability in foreign exchange falls into two groups: (1) tests using measures of asset supply and (2) tests using measures of central-bank asset demand. We address the...

This paper summarizes key lessons learned from using models from microstructure finance to explain and forecast exchange rates. The first section is an executive summary, which outlines seven lessons that pertain to how different transaction-flow measures (e.g., interbank flows versus end-user...