Knowledge that Transforms

I examine the sources of exchange rate dynamics by focusing on the information structure of FX trading. This structure permits the existence of an equilibrium distribution of transaction prices at a point in time. I develop and estimate a model of the price distribution using data from the Deutsche mark/dollar market that prroduces two striking results: (1) Much of the short‐term volatility in exchange rates comes from sampling the heterogeneous trading decisions of dealers in a distribution that, under normal market conditions, changes comparatively slowly; (2) public news is rarely the predominant source of exchange rate movements over any horizon.

ABSTRACT As of 1987, commercial banks in the United States were allowed to establish Section 20 subsidiaries to conduct investment‐banking activities. A concern of regulators was that these activities would result in a decrease in performance of commercial banks relative to the risk being undertaken. This paper examines the performance of commercial banks around the establishment of a Section 20 subsidiary. We find that Section 20 activities undertaken by banks result in increased industry‐adjusted operating cash flow return on assets, due mainly to revenues from noncommercial‐banking activities. Further, risk measures for the sample banks do not change significantly.