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The Big Players in the Foreign Exchange Market: Do They Trade on Information or Noise?

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Author Info
Wei, S.J.
Kim, J.

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Abstract

This paper studies whether there exists private information in the foreign exchange market, and whether speculation reduces or exacerbates volatility. It makes use of a recent data set on foreign currency positions by large market participants that include positions on options and other derivatives. This is the first data set that describes comprehensive currency positions of market participants. There are two main findings. First, not only the absolute value of the options position but also that of spot, forward and futures positions by large participants Granger-causes exchange rate volatility. This suggests that the large participants' currency speculation does not stabilize exchange rate volatility. Second, regression analyses do not find any positive association between large participants' position in a foreign currency with its subsequent appreciation. A non-parametric approach finds some weak support for a positive association but not on a systematic level. This casts into doubt the view that large participants have better information about the future movement of exchange rates. It further strengthens the case that the large players trade on noise rather than on information.

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Publisher Info
Paper provided by Chicago - Graduate School of Business in its series Papers with number 5.

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Length: 22 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:fth:chicbu:5

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Postal: UNIVERSITY OF CHICAGO, H.G.B. ALEXANDER FOUNDATION GRADUATE SCHOOL OF BUSINESS, CHICAGO ILLINOIS 60637 U.S.A.
Web page: http://gsb.uchicago.edu/
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Related research
Keywords: EXCHANGE RATE ; INFORMATION ; TRADING;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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.:

  1. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June. [Downloadable!] (restricted)
  2. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June. [Downloadable!] (restricted)
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  3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  4. Richard K. Lyons, 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," NBER Working Papers 4471, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August. [Downloadable!] (restricted)
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  6. Skinner, Douglas J., 1989. "Options markets and stock return volatility," Journal of Financial Economics, Elsevier, vol. 23(1), pages 61-78, June. [Downloadable!] (restricted)
  7. Figlewski, Stephen, 1981. "Futures Trading and Volatility in the GNMA Market," Journal of Finance, American Finance Association, vol. 36(2), pages 445-56, May. [Downloadable!] (restricted)
  8. Mahajan, Arvind & Mehta, Dileep, 1986. "Swaps, expectations, and exchange rates," Journal of Banking & Finance, Elsevier, vol. 10(1), pages 7-20, March. [Downloadable!] (restricted)
  9. Ma, Christopher K & Rao, Ramesh P, 1988. "Information Asymmetry and Options Trading," The Financial Review, Eastern Finance Association, vol. 23(1), pages 39-51, February.
  10. Jeffrey A. Frankel., 1987. "Monetary and Portfolio Balance Models of Exchange Rate Determination," Economics Working Papers 8752, University of California at Berkeley.
  11. Powers, Mark J, 1970. "Does Futures Trading Reduce Price Fluctuations in the Cash Markets?," American Economic Review, American Economic Association, vol. 60(3), pages 460-64, June. [Downloadable!] (restricted)
  12. Van Belle, John J, 1975. "The Behavior of Professional Risk-Bearers: Test of a Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 7(2), pages 253-57, May. [Downloadable!] (restricted)
  13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  14. John B. Corgel & Gerald D. Gay, 1984. "The Impact of GNMA Futures Trading on Cash Market Volatility," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(2), pages 176-190. [Downloadable!] (restricted)
  15. Cox, Charles C, 1976. "Futures Trading and Market Information," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1215-37, December. [Downloadable!] (restricted)
  16. Grossman, Sanford J, 1988. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," Journal of Business, University of Chicago Press, vol. 61(3), pages 275-98, July. [Downloadable!] (restricted)
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  17. Damodaran, Aswath & Lim, Joseph, 1991. "The effects of option listing on the underlying stocks' return processes," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 647-664, June. [Downloadable!] (restricted)
Full references

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. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley. [Downloadable!]
    Other versions:
  2. Paul De Grauwe & Marianna Grimaldi, 2003. "Intervention in the Foreign Exchange Market in a Model with Noise Traders," Working Papers 162003, Hong Kong Institute for Monetary Research. [Downloadable!]
  3. Paul De Grauwe & Marianna Grimaldi, 2004. "Bubbles and Crashes in a Behavioural Finance Model," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Paul de Grauwe & Roberto Dieci & Marianna Grimaldi, 2005. "Fundamental and Non-Fundamental Equilibria in the Foreign Exchange Market. A Behavioural Finance Framework," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Kenneth A. Froot & Tarun Ramadorai, 2002. "Currency Returns, Institutional Investor Flows, and Exchange Rate Fundamentals," NBER Working Papers 9101, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Torben G. Anderson & Tim Bollerslev & Ashish Das, 1998. "Testing for Market Microstructure Effects in Intraday Volatility: A Reassessment of the Tokyo FX Experiment," NBER Working Papers 6666, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Yin-Wong Cheung & Daniel Friedman, 2008. "Speculative Attacks: A Laboratory Study in Continuous Time," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  8. Geir H. Bjønnes & Steinar Holden & Dagfinn Rime & Haakon O.Aa. Solheim, 2005. "“Large” vs. “small” players: A closer look at the dynamics of speculative attacks," Working Paper 2005/13, Norges Bank. [Downloadable!]
    Other versions:
  9. Richard K. Lyons, 2001. "Foreign exchange: macro puzzles, micro tools," Pacific Basin Working Paper Series 01-10, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  10. Kevin Cowan & David Rappoport & Jorge Selaive, 2007. "High Frequency Dynamics of the Exchange Rate in Chile," Working Papers Central Bank of Chile 433, Central Bank of Chile. [Downloadable!]
  11. Marianna Grimaldi & Paul De Grauwe, 2003. "Bubbling and Crashing Exchange Rates," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  12. De Grauwe, Paul & Grimaldi, Marianna, 2004. "Exchange Rate Puzzles: A Tale of Switching Attractors," Working Paper Series 163, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  13. Shang-Jin Wei, 1998. "Currency Hedging and Goods Trade," NBER Working Papers 6742, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2001. "The Role of Large Players in Currency Crises," NBER Working Papers 8303, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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