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

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  • Geir H. Bjønnes
  • Dagfinn Rime
  • Haakon O. Aa. Solheim

Abstract

The relationship between volume and volatility has received much attention in the the literature of financial markets. However, due to the lack of data, few results have been presented for the foreign exchange market. Further, most studies contain only aggregate series, and can not distinguish between the impact of different instruments or participants.We study the impact of volume on volatility in the the FX-market using a unique data set of daily trading in the Swedish krona (SEK) market. The data set covers 95 per cent of worldwide SEK-trading, and is disaggregated on a number of reporting banks’ buying and selling in five different instruments on a daily basis over a period of nine years. We find that volume in general depict a positive correlation with volatility. However, the strength of the relationship depends on the instrument used and the identity of the reporting bank. In particular we find that it is the large Swedish banks that dominate the relationship. These banks are probably also the best informed banks. We interpret this is as evidence that heterogeneous expectations are important to understand the volume-volatility relationship.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 786.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_786

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Keywords: volume volatility relation; microstructure; exchange rates.;

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Citations

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Cited by:
  1. 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, Ghent University, Faculty of Economics and Business Administration 07/474, Ghent University, Faculty of Economics and Business Administration.
  2. Luc Bauwens & Dagfinn Rime & Genaro Sucarrat, 2006. "Exchange rate volatility and the mixture of distribution hypothesis," Empirical Economics, Springer, Springer, vol. 30(4), pages 889-911, January.
  3. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Working Paper, Norges Bank 2004/13, Norges Bank.
  4. Carpenter, Andrew & Wang, Jianxin, 2007. "Herding and the information content of trades in the Australian dollar market," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 15(2), pages 173-194, April.
  5. Mario Cerrato & Nicholas Sarantis & Alex Saunders, 2009. "An investigation of customer order flow in the foreign exchange market," Working Papers, Business School - Economics, University of Glasgow 2009_25, Business School - Economics, University of Glasgow, revised Feb 2010.
  6. Wang, Jianxin & Yang, Minxian, 2011. "Housewives of Tokyo versus the gnomes of Zurich: Measuring price discovery in sequential markets," Journal of Financial Markets, Elsevier, Elsevier, vol. 14(1), pages 82-108, February.
  7. Katarzyna Bien-Barkowska, 2012. ""Does it take volume to move fx rates?" Evidence from quantile regressions," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, Uniwersytet Mikolaja Kopernika, vol. 12, pages 35-52.
  8. Dagfinn Rime & Genaro Sucarrat, 2007. "Exchange rate variability, market activity and heterogeneity," Economics Working Papers, Universidad Carlos III, Departamento de Economía we077039, Universidad Carlos III, Departamento de Economía.
  9. Cerrato, Mario & Sarantis, Nicholas & Saunders, Alex, 2010. "An investigation of customer order flow in the foreign exchange market," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-11, Scottish Institute for Research in Economics (SIRE).
  10. Alexander Mende, 2006. "09/11 on the USD/EUR foreign exchange market," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(3), pages 213-222.

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