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

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Author Info

  • 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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References

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  1. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Discussion Papers 391, Research Department of Statistics Norway.
  2. Wu, Thomas Y, 2008. "Order Flow in the South: Anatomy of the Brazilian FX Market," Santa Cruz Department of Economics, Working Paper Series qt968459j2, Department of Economics, UC Santa Cruz.
  3. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
  4. Martin D. D. Evans & Richard K. Lyons, 2006. "Understanding order flow," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 3-23.
  5. Carol L. Osler, 2006. "Macro lessons from microstructure," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 55-80.
  6. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February.
  7. Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 249-82, April.
  8. 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.
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Cited by:
  1. John A Carlson & Christian M. Dahl & Carol L. Osler, 2008. "Short-run Exchange-Rate Dynamics: Theory and Evidence," CREATES Research Papers 2008-01, School of Economics and Management, University of Aarhus.
  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. 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.

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