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Local Information in Foreign Exchange Markets

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  • Menkhoff, Lukas
  • Schmeling, Maik

Abstract

This study shows that order flow in a foreign exchange market only has permanent price impact if it comes from certain regions. These regions are - as predicted by the local information hypothesis - centers of political and financial decision making. It is revealing that orders from other regions only show a very short-lived but no permanent price impact. Local information is so important that it carries over from the usually considered market orders to aggressively-priced limit orders too. The finding is robust to various market conditions, common news shocks and consideration of feedback trading.

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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-331.

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Length: 31 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:han:dpaper:dp-331

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Keywords: Local information hypothesis; price impact; limit orders; informed traders;

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References

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Citations

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Cited by:
  1. Andrade, Sandro C. & Kohlscheen, Emanuel, 2010. "Pessimistic Foreign Investors and Turmoil in Emerging Markets : The Case of Brazil in 2002," The Warwick Economics Research Paper Series (TWERPS) 926, University of Warwick, Department of Economics.
  2. Osler, Carol & Mende, Alexander & Menkhoff, Lukas, 2006. "Price Discovery in Currency Markets," Hannover Economic Papers (HEP) dp-351, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  3. Michael Melvin & Lukas Menkhoff & Maik Schmeling, 2008. "Automating Exchange Rate Target Zones: Intervention via an Electronic Limit Order Book," CESifo Working Paper Series 2221, CESifo Group Munich.
  4. Melvin, Michael & Menkhoff, Lukas & Schmeling, Maik, 2009. "Exchange rate management in emerging markets: Intervention via an electronic limit order book," Journal of International Economics, Elsevier, vol. 79(1), pages 54-63, September.
  5. Menkhoff, Lukas & Schmeling, Maik, 2010. "Trader see, trader do: How do (small) FX traders react to large counterparties' trades?," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1283-1302, November.
  6. Michael King & Carol Osler & Dagfinn Rime, 2012. "The Market Microstructure Approach to Foreign Exchange: Looking Back and Looking Forward," Working Papers 54, Brandeis University, Department of Economics and International Businesss School.
  7. Ding, Liang & Hiltrop, Jonas, 2010. "The electronic trading systems and bid-ask spreads in the foreign exchange market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 323-345, October.
  8. Menkhoff, Lukas & Schmeling, Maik, 2010. "Whose trades convey information? Evidence from a cross-section of traders," Journal of Financial Markets, Elsevier, vol. 13(1), pages 101-128, February.
  9. Lukas Menkhoff & Carol L. Osler & Maik Schmeling, 2010. "Limit-Order Submission Strategies under Asymmetric Information," CESifo Working Paper Series 3054, CESifo Group Munich.

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