The role of private information in return volatility, bid-ask spreads and price levels in the foreign exchange market
AbstractTrading volume and order flow have both been closely associated with informed trader activity in the market microstructure literature. Using theory that explains regular intraday patterns in trading data, we transform these two variables into proxies for private information and examine their relationships with bid-ask spreads and return volatility. We use a unique and unusually rich high-frequency intraday dataset from the world's largest financial market, namely, the electronic inter-dealer spot foreign exchange market. Our analysis takes account of institutional features peculiar to this order-driven market. Our empirical results strongly affirm our theoretical understanding of how these markets work. They also reveal how the structure of the inter-dealer spot FX market affects exchange rate volatility. Finally, we also explore how private information contributes to the evolution of prices.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.
Volume (Year): 19 (2009)
Issue (Month): 2 (April)
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Web page: http://www.elsevier.com/locate/intfin
High-frequency data Foreign exchange Market microstructure Asymmetric information Order-driven;
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