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Foreign Exchange Volume

Author

Listed:
  • Giovanni Cespa
  • Antonio Gargano
  • Steven J Riddiough
  • Lucio Sarno

Abstract

We investigate the information contained in foreign exchange (FX) volume using a novel data set from the over-the-counter market. We find volume helps predict next-day currency returns and is economically valuable for currency investors. Predictability implies a stronger return reversal for currency pairs with abnormally low volume and is driven by the component of volume unrelated to volatility, liquidity, and order flow. We rationalize these findings via a simple model, in which FX volume helps reveal the degree of asymmetric information in currency markets. Testing this prediction shows that asymmetric information is uniform across currency pairs but varies across instruments.

Suggested Citation

  • Giovanni Cespa & Antonio Gargano & Steven J Riddiough & Lucio Sarno, 2022. "Foreign Exchange Volume," The Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2386-2427.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:5:p:2386-2427.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab095
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    Cited by:

    1. Aldo Barrios & Rob Franolic & Davide Giovanardi & Michael Melvin, 2022. "Trading with the Informed and against the Uninformed: Flows and Positioning in the Global Currency Market," CESifo Working Paper Series 9921, CESifo.
    2. Leonie Bräuer & Harald Hau, 2022. "Can Time-Varying Currency Risk Hedging Explain Exchange Rates?," Swiss Finance Institute Research Paper Series 22-77, Swiss Finance Institute.
    3. Ranaldo, Angelo & de Magistris, Paolo Santucci, 2022. "Liquidity in the global currency market," Journal of Financial Economics, Elsevier, vol. 146(3), pages 859-883.
    4. Di Casola, Paola & Habib, Maurizio Michael & Tercero-Lucas, David, 2023. "Global and local drivers of Bitcoin trading vis-à-vis fiat currencies," Working Paper Series 2868, European Central Bank.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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