Stop-loss orders and price cascades in currency markets [An article from: Journal of International Money and Finance]

by C.L. Osler

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This digital document is a journal article from Journal of International Money and Finance, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

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Currency economists are puzzled by the great frequency of massive, abrupt exchange-rate changes. This paper provides evidence that such moves may be catalyzed by stop-loss orders, which create rapid, self-reinforcing price movements or ''price cascades.'' The central hypothesis comes from theoretical finance research indicating that stop-loss trading can cause price discontinuities manifested as price cascades. Price cascades, which are inconsistent with standard structural exchange-rate models, may contribute to the ''exchange-rate disconnect'' problem. The paper also provides evidence that exchange rates respond to non-informative order flow.

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