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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

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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Bibliographic Info

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
Date of revision:
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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Keywords: Volume-volatility relation; microstructure; exchange rates;

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References

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Citations

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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. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Working Paper 2004/13, Norges Bank.
  3. Luc, BAUWENS & Dagfinn, RIME & Genaro, SUCARRAT, 2005. "Exchange Rate Volatility and the Mixture of Distribution Hypothesis," Discussion Papers (ECON - Département des Sciences Economiques) 2005043, Université catholique de Louvain, Département des Sciences Economiques.
  4. 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.
  5. Katarzyna Bien-Barkowska, 2012. ""Does it take volume to move fx rates?" Evidence from quantile regressions," Dynamic Econometric Models, Wydawnictwo Naukowe Uniwersytetu Mikolaja Kopernika, vol. 12, pages 35-52.
  6. 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.
  7. Dagfinn Rime & Genaro Sucarrat, 2007. "Exchange rate variability, market activity and heterogeneity," Economics Working Papers we077039, Universidad Carlos III, Departamento de Economía.
  8. 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.
  9. M. Frömmel & A. Mende & L. Menkhoff, 2007. "Order Flows, News, and Exchange Rate Volatility," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/474, Ghent University, Faculty of Economics and Business Administration.

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