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Local information in foreign exchange markets

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Author Info
Menkhoff, Lukas
Schmeling, Maik

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Abstract

This study shows that order flow in a foreign exchange market appears to have permanent price impact only if it comes from certain regions. These regions are - as predicted by the local information hypothesis - centers of political and financial decision making. It is revealing that orders from other regions only show a very short-lived but no permanent price impact. Local information is so important that it carries over from the usually considered market orders to aggressively priced limit orders too. The finding is robust to common news shocks, to the consideration of feedback trading and to further controls.

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File URL: http://www.sciencedirect.com/science/article/B6V9S-4R29FFB-1/2/8b938a0b1b4e480186dac557f2e19a46
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Publisher Info
Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 8 (December)
Pages: 1383-1406
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Handle: RePEc:eee:jimfin:v:27:y:2008:i:8:p:1383-1406

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Web page: http://www.elsevier.com/locate/inca/30443

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Related research
Keywords: Local information hypothesis Price impact Limit orders Informed traders;

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Melvin & Lukas Menkhoff & Maik Schmeling, 2008. "Automating Exchange Rate Target Zones: Intervention via an Electronic Limit Order Book," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Michael Melvin & Lukas Menkhoff & Maik Schmeling, 2009. "Exchange Rate Management in Emerging Markets: Intervention via an Electronic Limit Order Book," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
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