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Marketwide Private Information in Stocks: Forecasting Currency Returns

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  • RUI ALBUQUERQUE
  • EVA DE FRANCISCO
  • LUIS B. MARQUES

Abstract

We present a model of equity trading with informed and uninformed investors where informed investors trade on firm-specific and marketwide private information. The model is used to identify the component of order flow due to marketwide private information. Estimated trades driven by marketwide private information display little or no correlation with the first principal component in order flow. Indeed, we find that co-movement in order flow captures variation mostly in liquidity trades. Marketwide private information obtained from equity market data forecasts industry stock returns, and also currency returns. Copyright (c) 2008 The American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 63 (2008)
Issue (Month): 5 (October)
Pages: 2297-2343

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Handle: RePEc:bla:jfinan:v:63:y:2008:i:5:p:2297-2343

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Citations

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Cited by:
  1. Lukas Mankhoff & Lucio Sarno & Maik Schmeling & Andreas Schrimpf, 2013. "Information Flows in Dark Markets: Dissecting Customer Currency Trades," BIS Working Papers 405, Bank for International Settlements.
  2. Gençay, Ramazan & Gradojevic, Nikola, 2013. "Private information and its origins in an electronic foreign exchange market," Economic Modelling, Elsevier, vol. 33(C), pages 86-93.
  3. Ülkü, Numan & Demirci, Ebru, 2012. "Joint dynamics of foreign exchange and stock markets in emerging Europe," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 55-86.
  4. Kees E. Bouwman & Elvira Sojli & Wing Wah Tham, 2012. "Aggregate Stock Market Illiquidity and Bond Risk Premia," Tinbergen Institute Discussion Papers 12-140/IV/DSF46, Tinbergen Institute.
  5. Kees E. Bouwman & Elvira Sojli & Wing Wah Tham, 2012. "Aggregate Stock Market Illiquidity and Bond Risk Premia," Tinbergen Institute Discussion Papers 12-140/IV/DSF46, Tinbergen Institute.
  6. Lynch, Andrew & Nikolic, Biljana & Yan, Xuemin (Sterling) & Yu, Han, 2014. "Aggregate short selling, commonality, and stock market returns," Journal of Financial Markets, Elsevier, vol. 17(C), pages 199-229.
  7. Jacob Gyntelberg & Mico Loretan & Tientip Subhanij & Eric Chan, 2009. "Private information, stock markets, and exchange rates," Working Papers 2009-07, Economic Research Department, Bank of Thailand.
  8. Jacob Gyntelberg & Subhanij Tientip & Mico Loretan, 2012. "Private Information, Capital Flows, and Exchange Rates," IMF Working Papers 12/213, International Monetary Fund.
  9. Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2009. "The information content of market liquidity: An empirical analysis of liquidity at the Oslo Stock Exchange?," Working Paper 2009/26, Norges Bank.
  10. Visaltanachoti, Nuttawat & Charoenwong, Charlie & Ding, David K., 2011. "Information asymmetry in warrants and their underlying stocks on the stock exchange of Thailand," Journal of Empirical Finance, Elsevier, vol. 18(3), pages 474-487, June.
  11. Pasquariello, Paolo & Vega, Clara, 2009. "The on-the-run liquidity phenomenon," Journal of Financial Economics, Elsevier, vol. 92(1), pages 1-24, April.
  12. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2009. "Understanding the Forward Premium Puzzle: A Microstructure Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 127-54, July.
  13. Tirapat, Sunti & Visaltanachoti, Nuttawat, 2013. "Opportunistic insider trading," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1046-1061.
  14. Ferreira Filipe, Sara, 2012. "Equity order flow and exchange rate dynamics," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 359-381.
  15. Foucault, Thierry & Fresard, Laurent, 2014. "Learning from peers' stock prices and corporate investment," Journal of Financial Economics, Elsevier, vol. 111(3), pages 554-577.

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