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Information Flows in Dark Markets: Dissecting Customer Currency Trades

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Author Info

  • Lukas Mankhoff
  • Lucio Sarno
  • Maik Schmeling
  • Andreas Schrimpf

Abstract

We study the information in order flows of different customer segments in the world's largest over-the-counter market, the foreign exchange market. The analysis draws on a unique dataset covering a broad cross-section of currency pairs and distinguishing trades by key types of foreign exchange end-users. We find that order flows are highly informative about future exchange rates and provide significant economic value for the few large dealers who have access to these flows. Moreover, customer groups systematically engage in risk sharing with each other and differ markedly in their predictive ability, trading styles, and risk exposure.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 405.

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Length: 74 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:bis:biswps:405

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Related research

Keywords: Order Flow; Foreign Exchange Risk Premia; Heterogeneous Information; Carry Trades; Hedge Funds;

References

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Cited by:
  1. Schreiber, Ben Z., 2014. "Identifying speculators in the FX market: A microstructure approach," Journal of Economics and Business, Elsevier, Elsevier, vol. 73(C), pages 97-119.

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