文档介绍：Competitive Entry and
Endogenous Risk in the Foreign
Exchange Market
Harald Hau
ESSEC
Recent evidence shows that higher trader participation
increases exchange rate volatility. To explore this link-
age, we develop a dynamic model of endogenous entry of
traders subject to heterogenous expectational errors. En-
try of a marginal trader into the market has two effects:
it increases the capacity of the market to absorb exoge-
nous supply risk, and at the same time it adds noise and
endogenous trading risk. petitive entry equilib-
rium is characterized by excessive market entry and ex-
cessively volatile prices. A positive tax on entrants can
decrease trader participation and volatility while increas-
ing market efficiency.
Recent empirical research on the microstructure of the for-
eign exchange market has documented increased exchange
rate volatility for periods of higher trader participation.
Ito, Lyons, and Melvin (1998) find that lunch-hour ex-
change rate variance doubles in 1994 when Tokyo traders
were permitted to participate in the market making be-
tween 12:00 . and 1:30 . The evidence poses a wide
range of questions: Why does greater market participation
increase volatility? petitive financial markets like
the foreign exchange market provide the right incentives
for market entry of speculative traders? And if not, can a
I thank Dirk Bergemann, Ulrich Hege, David Hirshleifer (the editor), Charles
Jones, Paolo Pesenti, Patrice Poncet, h Rogoff, Ananth Madhavan, Mar-
cel Thum, Timothy van Zandt, an anonymous referee, and seminar participants
at Princeton University, IIES Stockholm, HEC, ESSEC, ECARE, and the EFA
conference in Vienna for ments on an earlier draft. I am grateful to Allan
Brunner who provided the data on the trading profits of . banks. The usual
disclaimer applies. Address correspondence to Harald Hau, ESSEC, School of
Management, Avenue Bernard Hirsch, . 105, 95021 Cergy-Pontoise Cedex,
France, or e-mail