In this study, we leverage various price discovery measurements to investigate whether and how the addition of the Chinese yuan in Special Drawing Right (SDR) affected price discovery in onshore (USD/CNY) and offshore (USD/CNH) markets. The results show that the less regulated offshore exchange rates contribute more to price discovery than the onshore rates do. Including the yuan in SDR does not change the relative price discovery contributions of the onshore and offshore markets, and more importantly, it enhances the overall price efficiency in both markets, due to lower autocorrelations in the error correction term and fewer arbitrage opportunities. In particular, the price spreads between the onshore and offshore markets decrease, implying that arbitrage opportunities have diminished, as market integration has increased, following the inclusion of the yuan in SDR.

This paper studies competition in price discovery between spot and futures rates for the EUR–USD and JPY–USD markets around scheduled macroeconomic announcements. Using both the information shares approach and the common factor component weight approach for futures prices from the Chicago Mercantile Exchange (CME), as well as deal prices from spot trading on the Electronic Broking Services (EBS), we gauge how foreign exchange spot and futures markets respond to news surprises. The results show that the spot rates provide more price discovery than do the CME futures rates overall; however, the contribution of the futures rates to price discovery increases in the time surrounding macroeconomic announcement releases.

This study considers the effects of the relative size of hedger and speculator open interests and the potential impact of implementing position limits on the price discovery process in both JPY–USD and EUR–USD futures markets. Hedging trading exerts a negative impact, regardless of its size, on price discovery in futures markets. Hedgers are less likely to be information motivated, so their trading uniformly delays the price discovery process. However, there is a positive and nonlinear impact of speculators’ trade size on price discovery, the contribution of which depends on the relative size of the speculative open interest. Contrary to conventional wisdom among regulators, speculative trading does not harm the market in terms of market efficiency; as long as the percentage of speculators’ open interest is below an endogenously determined threshold (approximately 20% for EUR–USD and 16.3% for JPY–USD), speculative trading even improves futures market efficiency.