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Volume and Volatility in the FX Market: Does it matter who you are?

Author

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  • Geir Hoidal Bjonnes
  • Dagfinn Rime

    (Norges Bank)

  • Haakon O. Aa. Solheim

Abstract

The relationship between volume and volatility has received much attention in the literature on financial markets. However, due to the lack of data, few results have been presented for the foreign exchange (FX) market. Furthermore, most studies contain only aggregate series, and cannot distinguish between the impact of different participants or instruments. We study the impact of volume on volatility in the FX market using a unique data set of daily trading in the Swedish krona (SEK) market. The data set covers 95 percent of worldwide SEK trading, and is disaggregated on a number of reporting banks' buying and selling in five different instruments on a daily basis from 1995 until 2002. We find that volume in general show a positive correlation with volatility. However, the strength of the relationship depends on the instrument traded and the identity of the reporting bank. In particular, we find that trading tends to concentrate around the largest banks during periods of high volatility. These banks are probably also best informed. This is especially the case when volatility is high. We interpret this as evidence that heterogeneous expectations are important to an understanding of the volume-volatility relationship.

Suggested Citation

  • Geir Hoidal Bjonnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2003. "Volume and Volatility in the FX Market: Does it matter who you are?," Working Paper 2003/7, Norges Bank.
    • Handle: RePEc:bno:worpap:2003_07
    Note: Forthcoming in Exchange Rate Modelling: Where do we Stand? (Paul De Grauwe, ed.), MIT Press
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    References listed on IDEAS

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    Cited by:

    1. Alexander Mende, 2006. "09/11 on the USD/EUR foreign exchange market," Applied Financial Economics, Taylor & Francis Journals, vol. 16(3), pages 213-222.
    2. Cerrato, Mario & Sarantis, Nicholas & Saunders, Alex, 2011. "An investigation of customer order flow in the foreign exchange market," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1892-1906, August.
    3. Frömmel, Michael & Mende, Alexander & Menkhoff, Lukas, 2008. "Order flows, news, and exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 994-1012, October.
    4. Michael Sager & Mark P. Taylor, 2008. "Commercially Available Order Flow Data and Exchange Rate Movements: Caveat Emptor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 583-625, June.
    5. Luc Bauwens & Dagfinn Rime & Genaro Sucarrat, 2008. "Exchange rate volatility and the mixture of distribution hypothesis," Studies in Empirical Economics, in: Luc Bauwens & Winfried Pohlmeier & David Veredas (ed.), High Frequency Financial Econometrics, pages 7-29, Springer.
    6. Katarzyna Bien-Barkowska, 2012. ""Does it take volume to move fx rates?" Evidence from quantile regressions," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 12, pages 35-52.
    7. Tomislav Galac & Ante Burić & Ivan Huljak, 2006. "Microstructure of Foreign Exchange Market in Croatia," Working Papers 15, The Croatian National Bank, Croatia.
    8. Bjonnes, Geir Hoidal & Rime, Dagfinn & Solheim, Haakon O.Aa., 2005. "Liquidity provision in the overnight foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 175-196, March.
    9. Carpenter, Andrew & Wang, Jianxin, 2007. "Herding and the information content of trades in the Australian dollar market," Pacific-Basin Finance Journal, Elsevier, vol. 15(2), pages 173-194, April.
    10. Wang, Jianxin & Yang, Minxian, 2011. "Housewives of Tokyo versus the gnomes of Zurich: Measuring price discovery in sequential markets," Journal of Financial Markets, Elsevier, vol. 14(1), pages 82-108, February.
    11. Jakree Koosakul & Ilhyock Shim, 2017. "The beneficial aspect of FX volatility for market liquidity," BIS Working Papers 629, Bank for International Settlements.
    12. Rim Khemiri, 2012. "Volume and volatility in foreign exchange market microstructure: a Markov switching approach," Applied Financial Economics, Taylor & Francis Journals, vol. 22(14), pages 1121-1133, July.
    13. Rime, Dagfinn & Sucarrat, Genaro, 2007. "Exchange rate variability, market activity and heterogeneity," UC3M Working papers. Economics we077039, Universidad Carlos III de Madrid. Departamento de Economía.

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    Keywords

    Volume-volatility relation; microstructure; exchange rates;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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