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On the sources of private information in FX markets

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Author Info

  • Moore, Michael J.
  • Payne, Richard

Abstract

We investigate the source of information advantage in inter-dealer FX trading using data on trades and counter-party identities. In liquid dollar exchange rates, information is concentrated among dealers that trade most frequently and specialize their activity in a particular rate. In cross-rates, traders that engage in triangular arbitrage are best informed. Better-informed traders are also located on larger trading floors. In cross-rates, the ability to forecast flows explains all of the advantage of the triangular arbitrageurs. In liquid dollar rates, specialist traders can forecast both order-flow and the component of exchange rate changes that is uncorrelated with flow.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 5 (May)
Pages: 1250-1262

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:5:p:1250-1262

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Related research

Keywords: Market microstructure Exchange rates Private information;

References

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Citations

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Cited by:
  1. Carol Osler, 2012. "Market Microstructure and the Profitability of Currency Trading," Working Papers, Brandeis University, Department of Economics and International Businesss School 48, Brandeis University, Department of Economics and International Businesss School.
  2. Michael R. King & Carol Osler & Dagfinn Rime, 2013. "The market microstructure approach to foreign exchange - Looking back and looking forward," Working Paper, Norges Bank 2013/12, Norges Bank.
  3. 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.
  4. M. Frömmel & F Van Gysegem, 2014. "Bid-Ask Spread Components on the Foreign Exchange Market: Quantifying the Risk Component," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 14/878, Ghent University, Faculty of Economics and Business Administration.
  5. Chen, Yu-Lun & Gau, Yin-Feng, 2014. "Asymmetric responses of ask and bid quotes to information in the foreign exchange market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 38(C), pages 194-204.
  6. Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers, Brandeis University, Department of Economics and International Businesss School 49, Brandeis University, Department of Economics and International Businesss School.
  7. Schreiber, Ben Z., 2014. "Identifying speculators in the FX market: A microstructure approach," Journal of Economics and Business, Elsevier, Elsevier, vol. 73(C), pages 97-119.
  8. Ligon, James A. & Liu, Hao-Chen, 2013. "The relation of trade size and price contribution in a traditional foreign exchange brokered market," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 21(1), pages 1024-1045.

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