Dagfinn Rime is Associate Dean for the BSc in Finance. Rime's primary research interest are in international finance, in particular the microstructure of foreign exchange markets, and empirical asset pricing. His papers have been published in journals like Journal of Financial Economics, Review of Financial Studies, Journal of Monetary Economics, and Journal of International Economics, among others. Dagfinn received his PhD from the BI Norwegian Business School in 2001. Prior to moving to BI in March 2014 he was a researcher in the the Norges Bank (central bank of Norway). He has also been a visiting research fellow at SIFR (Stockholm) 2001-2006, and adjunct professor at the Norwegian University of Science and Technology (NTNU).
To understand deviations from covered interest parity (CIP), it is crucial to account for heterogeneity in funding costs across both banks and currency areas. For most market participants, the no-arbitrage relation holds fairly well when implemented using marginal funding costs and risk-free investment instruments. However, a few high-rated banks do enjoy CIP-arbitrage opportunities. Dealers avert inventory imbalances stemming from lower-rated banks' usage of FX swaps to obtain dollar funding by inducing opposite (arbitrage) flows from high-rated banks. Arbitrage trades are difficult to scale, however, because funding costs increase as soon as arbitrageurs increase positions.
Breedon, Francis; Rime, Dagfinn & Vitale, Paolo (2016)
Carry Trades, Order Flow and the Forward Bias Puzzle
Journal of Money, Credit and Banking, 48(6), s. 1113- 1134. Doi: 10.1111/jmcb.12328
We investigate the relation between foreign exchange (FX) order flow and the forward bias. We outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time‐varying risk premium consistent with that bias. Using 10 years of data on FX order flow, we find that more than half of the forward bias is accounted for by order flow—with the rest being explained by expectational errors. We also find that carry trading increases currency‐crash risk in that order flow generates negative skewness in FX returns.
Fratzscher, Marcel; Rime, Dagfinn, Sarno, Lucio & Zinna, Gabriele (2015)
The scapegoat theory of exchange rates: The first tests
The scapegoat theory of exchange rates (Bacchetta and van Wincoop, 2004, Bacchetta and van Wincoop, 2013) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as “scapegoats” to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, we find empirical evidence that supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates in sample, although their out-of-sample forecasting performance is mixed.
Rime, Dagfinn; Sarno, Lucio & Sojli, Elvira (2010)
Exchange rate forecasting, order flow and macroeconomic information
This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data collected via a live feed from Reuters for three major exchange rates, we find that: i) order flow is intimately related to a broad set of current and expected macroeconomic fundamentals; ii) more importantly, order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise, on the basis of economic value criteria such as Sharpe ratios and performance fees implied by utility calculations.
Akram, Qaisar Farooq; Rime, Dagfinn & Sarno, Lucio (2008)
Arbitrage in the Foreign Exchange Market: Turning on the Microscope
This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency. The analysis unveils that: i) short-lived violations of CIP arise; ii) the size of CIP violations can be economically significant; iii) their duration is, on average, high enough to allow agents to exploit them, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.
Bjønnes, Geir Høidal & Rime, Dagfinn (2005)
Dealer behavior and trading systems in foreign exchange markets
We study dealer behavior in the foreign exchange spot market using detailed observations on all the transactions of four interbank dealers. There is strong support for an information effect in incoming trades. The direction of trade is most important, but we also find that the information effect increases with trade size in direct bilateral trades. All four dealers control their inventory intensively. Inventory control is not, however, manifested through a dealer's own prices in contrast to findings by Lyons (J. Financial Econ. 39(1995) 321). Furthermore, we document differences in trading styles, especially how they actually control their inventories. (c) 2004 Elsevier B.V. All rights reserved.
Gürkaynak, Refet S. & Wright, Jonathan H. (red.). Research Handbook of Financial Markets
This chapter discusses the structure and functioning of the spot foreign exchange (FX) market. The market structure, which has become far more complex over the past three decades, has mostly evolved endogenously as the global FX market is subject to notably less regulatory oversight than equity and bond markets in most countries. Major banks used to dominate liquidity provision, but they have found their role challenged by High Frequency Trading firms in an increasingly fragmented electronic market. The information structure of the market has also changed. As such, high-frequency cross-asset correlations, especially with the futures market, have become more important. The chapter also discusses the important role of the official sector in the FX market, and it highlights a few special topics such as flash events and the FX fixing scandal. We conclude with some suggestions for future research.
Bjønnes, Geir Høidal; Osler, Carol L. & Rime, Dagfinn (2020)
Price Discovery in Two-Tier Markets
International Journal of Finance and Economics Doi: 10.1002/ijfe.1953
This paper examines the price discovery process in a two-tier market, specifically the foreign-exchange market. The goal is to identify the sources of private information and to gain insights into the process through which that informa- tion influences the market price. Using a transactions database that includes trading-party identities, we show that sustained post-trade returns rise with bank size, implying that larger banks have an information advantage. The larger banks exploit this information advantage in placing limit orders as well as market orders. We also show that the bank's private information does not come from their corporate or government customers or from some asset managers. Instead, the bank's private information appears to come from other asset managers, including hedge funds, and from the bank's own analysis
Natvik, Gisle James; Rime, Dagfinn & Syrstad, Olav (2020)
Does publication of interest rate paths provide guidance?
Does the central bank practice of publishing interest rate projections (IRPs) improve how market participants map new information into future interest rates? Using high-frequency data on forward rate agreements (FRAs) we compute market forecast errors; differences between expected future interest rates and ex-post realizations. We assess their change in narrow windows around monetary policy announcements and macroeconomic releases in Norway and Sweden. Overall, communication of future policy plans does not improve markets’ response to information, irrespective of whether or not IRPs are in place. A decomposition of market reactions into responses to the current monetary policy action (“target”) and responses to signals about the future (“path”), reveals that only policy actions lead to improvements in market forecasts.
Evans, Martin D. D. & Rime, Dagfinn (2019)
Microstructure of Foreign Exchange Markets
Hamilton, Jonathan H. (red.). Oxford Research Encyclopedias: Economics and Finance
An overview of research on the microstructure of foreign exchange (FX) markets is presented. We begin by summarizing the institutional features of FX trading and describe how they have evolved since the 1980s. We then explain how these features are represented in microstructure models of FX trading. Next, we describe the links between microstructure and traditional macro exchange-rate models and summarize how these links have been explored in recent empirical research. Finally, we provide a microstructure perspective on two recent areas of interest in exchange-rate economics: the behavior of returns on currency portfolios, and questions of competition and regulation.
The offshore renminbi (CNH) exchange rate is the exchange rate of the Chinese currency transacted outside China. We study the CNH exchange rate dynamics and its links with onshore exchange rates. Using a specialized microstructure dataset, we find that CNH is significantly affected by its order flow and limit-order imbalance. The offshore CNH exchange rate has an increasing impact on the onshore rate, and significant predictive power for the official RMB central parity rate. The CNH order flow also affects the onshore RMB exchange rate and the central parity rate. The interactions between variables are likely to be time-varying.
Bjønnes, Geir Høidal; Holden, Steinar, Rime, Dagfinn & Solheim, Haakon O. Aa (2014)
'Large' vs. 'Small' Players: A Closer Look at the Dynamics of Speculative Attacks
What is the role of “large players” (e.g., hedge funds) in speculative attacks? Recent work suggests that large players move early to induce smaller agents to attack. However, many observers argue that large players move late in order to benefit from interest-rate differentials. We propose a model in which large players can do both. Using data on currency trading by foreign (large) and local (small) players, we find that foreign players moved last in three attacks on the Norwegian krone during the 1990s. During the attack on the Swedish krona after the Russian moratorium in 1998, foreign players moved early. Gains by delaying attack were small, however, because interest rates did not increase.
King, Michael R.; Osler, Carol L. & Rime, Dagfinn (2013)
The market micorstructure approach to foreign exchange: Looking back and looking forward
This paper investigates the validity of the law of one price (LOP) in international financial markets by examining the frequency, size and duration of inter-market price differentials for borrowing and lending services (‘one-way arbitrage’). Using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, we find that the LOP holds on average, but numerous economically significant violations of the LOP arise. The duration of these violations is high enough to make it worthwhile searching for one-way arbitrage opportunities in order to minimize borrowing costs and/or maximize earnings on given funds. We also document that such opportunities decline with the pace of the market and increase with market volatility.
We present evidence that non-financial customers are the main liquidity providers in the overnight foreign exchange market using a unique daily data set covering almost all transactions in the SEK/EUR market over almost 10 years. Two main findings support this: (i) the net position of non-financial customers is negatively correlated with the exchange rate, opposed to the positive correlation found for financial customers and (ii) changes in net position of non-financial customers are forecasted by changes in net position of financial customers, indicating that non-financial customers take a passive role consistent with liquidity provision. (c) 2004 Elsevier Ltd. All rights reserved.