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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6256.
Length: Date of creation: Nov 1997 Date of revision: Handle: RePEc:nbr:nberwo:6256
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange
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.:
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.
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Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2002.
"The Role of Large Players in Currency Crises,"
NBER Chapters,
in: Preventing Currency Crises in Emerging Markets, pages 197-268
National Bureau of Economic Research, Inc.
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