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Foreign Exchange Volume: Sound and Fury Signifying Nothing?

In: The Microstructure of Foreign Exchange Markets

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  • Richard K. Lyons

Abstract

This paper examines whether currency trading volume is informative, and under what circumstances. Specifically, we use transactions data to test whether trades occurring when trading intensity is high are more informative - dollar for dollar - than trades occurring when intensity is low. Theory admits both possibilities, depending primarily on the posited information structure. We present what we call a hot-potato model of currency trading, which explains why low-intensity trades might be more informative. In the model, the wave of inventory-management trading among dealers following innovations in order flow generates an inverse relationship between intensity and information content. Empirically, low-intensity trades are more informative, supporting the hot-potato hypothesis."

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This chapter was published in:

  • Jeffrey A. Frankel & Giampaolo Galli & Alberto Giovannini, 1996. "The Microstructure of Foreign Exchange Markets," NBER Books, National Bureau of Economic Research, Inc, number fran96-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11365.

    Handle: RePEc:nbr:nberch:11365

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    1. Ananth Madhavan & Seymour Smidt, . "A Bayesian Model of Intraday Specialist Pricing," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 2-91, Wharton School Rodney L. White Center for Financial Research.
    2. Richard K. Lyons, 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," NBER Working Papers 4471, National Bureau of Economic Research, Inc.
    3. Bessembinder, Hendrik, 1994. "Bid-ask spreads in the interbank foreign exchange markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 35(3), pages 317-348, June.
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    6. Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 55(220), pages 437-60, November.
    7. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 576-605, June.
    8. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(3), pages 317-55, July.
    9. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(1), pages 71-100, March.
    10. Hasbrouck, Joel, 1991. "The Summary Informativeness of Stock Trades: An Econometric Analysis," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(3), pages 571-95.
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    12. O'Hara, Maureen & Oldfield, George S., 1986. "The Microeconomics of Market Making," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 21(04), pages 361-376, December.
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    15. Manaster, Steven & Mann, Steven C, 1996. "Life in the Pits: Competitive Market Making and Inventory Control," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 9(3), pages 953-75.
    16. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 733-46, June.
    17. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(3), pages 257-275, June.
    18. Hasbrouck, Joel, 1988. "Trades, quotes, inventories, and information," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(2), pages 229-252, December.
    19. Roell, Ailsa, 1990. "Dual-capacity trading and the quality of the market," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 1(2), pages 105-124, June.
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    21. Ho, Thomas S Y & Stoll, Hans R, 1983. " The Dynamics of Dealer Markets under Competition," Journal of Finance, American Finance Association, American Finance Association, vol. 38(4), pages 1053-74, September.
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