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The role of asymmetric information among investors in the foreign exchange market

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  • Esen Onur

    (Department of Economics, California State University, Sacramento 6000J Street, Sacramento, CA 95819-6082, USA)

Abstract

This paper posits asymmetric information as the missing link between the currency demands of investors and changes in the exchange rate. A theoretical model demonstrates that changes in the exchange rate and currency demand are positively correlated for well-informed investors and negatively correlated for less well-informed investors, results consistent with stylized facts from the empirical literature. These theoretical findings are supported empirically using a new data set from the Israeli foreign exchange market. The empirical analysis indicates that a one million dollar larger purchase than sales by well-informed financial investors induces an increase of 0.060 per cent in the Israeli Sheqel|Dollar exchange rate over a one month period. A similar net flow from less well-informed investors results in a 0.046 per cent decrease in the exchange rate. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.367
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 13 (2008)
Issue (Month): 4 ()
Pages: 368-385

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Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:4:p:368-385

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  1. Eric van Wincoop & Philippe Bacchetta, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," NBER Working Papers 9498, National Bureau of Economic Research, Inc.
  2. Robert P. Flood & Andrew K. Rose, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," NBER Working Papers 4503, National Bureau of Economic Research, Inc.
  3. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Discussion Papers, Research Department of Statistics Norway 391, Research Department of Statistics Norway.
  4. Martin D. D. Evans (Georgetown University), 2005. "Understanding Order Flow," Working Papers, Georgetown University, Department of Economics gueconwpa~05-05-19, Georgetown University, Department of Economics.
  5. Carol L. Osler, 2006. "Macro lessons from microstructure," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(1), pages 55-80.
  6. Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(2), pages 249-82, April.
  7. Wu, Thomas, 2006. "Order Flow in the South: Anatomy of the Brazilian FX Market," Santa Cruz Department of Economics, Working Paper Series qt1k2250wj, Department of Economics, UC Santa Cruz.
  8. Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
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Cited by:
  1. Wu, Thomas, 2012. "Order flow in the South: Anatomy of the Brazilian FX market," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 310-324.
  2. Onur, Esen, 2011. "How much you know matters: A note on the exchange rate disconnect puzzle," MPRA Paper 32772, University Library of Munich, Germany.
  3. John A. Carlson & Christian M. Dahl & Carol L. Osler, 2008. "Short-run Exchange-rate Dynamics: Theory And Evidence," Working Papers, Brandeis University, Department of Economics and International Businesss School 39, Brandeis University, Department of Economics and International Businesss School.

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