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

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  • Shang-Jin Wei
  • Jungshik Kim

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 doubt on 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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6256.

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Date of creation: Nov 1997
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Handle: RePEc:nbr:nberwo:6256

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  1. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June.
  2. 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.
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