Affiliation:
1. Bayes Business School-City, University of London and CEPR
2. University of Houston
3. University of Toronto
4. University of Cambridge and CEPR
Abstract
Abstract
We investigate the information contained in foreign exchange (FX) volume using a novel data set from the over-the-counter market. We find volume helps predict next-day currency returns and is economically valuable for currency investors. Predictability implies a stronger return reversal for currency pairs with abnormally low volume and is driven by the component of volume unrelated to volatility, liquidity, and order flow. We rationalize these findings via a simple model, in which FX volume helps reveal the degree of asymmetric information in currency markets. Testing this prediction shows that asymmetric information is uniform across currency pairs but varies across instruments.
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics,Finance,Accounting
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