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

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Author Info
Geir Hoidal Bjonnes ()
Dagfinn Rime () (Norges Bank)
Haakon O. Aa. Solheim ()

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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.

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Paper provided by Norges Bank in its series Working Paper with number 2003/7.

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Length: 24 pages
Date of creation: 20 Aug 2003
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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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Related research
Keywords: Volume-volatility relation; microstructure; exchange rates;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luc Bauwens & Dagfinn Rime & Genaro Sucarrat, 2006. "Exchange rate volatility and the mixture of distribution hypothesis," Empirical Economics, Springer, vol. 30(4), pages 889-911, January. [Downloadable!] (restricted)
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  2. Mende, Alexander, 2005. "09/11 on the USD/EUR Foreign Exchange Market," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-312, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  3. Dagfinn Rime & Genaro Sucarrat, 2007. "Exchange rate variability, market activity and heterogeneity," Economics Working Papers we077039, Universidad Carlos III, Departamento de Economía. [Downloadable!]
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