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Author Info
H. Henry Cao
Richard K. Lyons
Martin D.D. Evans

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Abstract

In a market with symmetric information about fundamentals, can information-based trade still arise? Consider bond and FX markets, where private information about nominal cash flows is generally absent, but participants are convinced that superior information exists. We analyze a class of asymmetric information - inventory information - that is unrelated to fundamentals, but still forecasts future price (by forecasting future discount factors). Empirical work based on the analysis shows that inventory information in FX does indeed forecast discount factors, and does so over both short and long horizons. The immediate price impact of shocks to inventory information is large, roughly 50 percent of that from public information shocks (the latter being the whole story under symmetric information). Within about 30 minutes the transitory effect dies out, and prices reflect a permanent effect from inventory information that ranges between 15 and 30 percent of that from public information.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9893.

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Date of creation: Aug 2003
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Handle: RePEc:nbr:nberwo:9893

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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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. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September. [Downloadable!] (restricted)
  2. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April. [Downloadable!] (restricted)
    Other versions:
  3. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February. [Downloadable!] (restricted)
    Other versions:
  4. Martin D. D. Evans, 2002. "FX Trading and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 57(6), pages 2405-2447, December. [Downloadable!] (restricted)
    Other versions:
  5. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers 02-16, Duke University, Department of Economics. [Downloadable!]
    Other versions:
  6. Foster, F Douglas & Viswanathan, S, 1990. "A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(4), pages 593-624. [Downloadable!] (restricted)
  7. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April. [Downloadable!] (restricted)
  8. Covrig, Vicentiu & Melvin, Michael, 2002. "Asymmetric information and price discovery in the FX market: does Tokyo know more about the yen?," Journal of Empirical Finance, Elsevier, vol. 9(3), pages 271-285, August. [Downloadable!] (restricted)
  9. Biais, Bruno, 1993. " Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, vol. 48(1), pages 157-85, March. [Downloadable!] (restricted)
  10. Cheung, Yin-Wong & Wong, Clement Yuk-Pang, 2000. "A survey of market practitioners' views on exchange rate dynamics," Journal of International Economics, Elsevier, vol. 51(2), pages 401-419, August. [Downloadable!] (restricted)
  11. Fishman, Michael J & Longstaff, Francis A, 1992. " Dual Trading in Futures Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 643-71, June. [Downloadable!] (restricted)
  12. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier. [Downloadable!] (restricted)
  13. Foster, F Douglas & Viswanathan, S, 1993. " Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models," Journal of Finance, American Finance Association, vol. 48(1), pages 187-211, March. [Downloadable!] (restricted)
  14. Ciccotello, Conrad S. & Hatheway, Frank M., 2000. "Indicating Ahead: Best Execution and the NASDAQ Preopening," Journal of Financial Intermediation, Elsevier, vol. 9(2), pages 184-212, April. [Downloadable!] (restricted)
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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. Michael J. Barclay & Terrence Hendershott & Kenneth Kotz, 2006. "Automation versus Intermediation: Evidence from Treasuries Going Off the Run," Journal of Finance, American Finance Association, vol. 61(5), pages 2395-2414, October. [Downloadable!] (restricted)
  2. Martin D.D. Evans & Richard K. Lyons, 2004. "A New Micro Model of Exchange Rate Dynamics," NBER Working Papers 10379, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Chris D'Souza, 2007. "Where Does Price Discovery Occur in FX Markets?," Working Papers 07-52, Bank of Canada. [Downloadable!]
  4. Michael J. Fleming & Joshua V. Rosenberg, 2007. "How do treasury dealers manage their positions?," Staff Reports 299, Federal Reserve Bank of New York. [Downloadable!]
  5. Bjonnes,H. & Rime,D., 2000. "Customer trading and information in foreign exchange markets," Memorandum 30/2000, Oslo University, Department of Economics. [Downloadable!]
  6. Toni Gravelle, 2002. "The Microstructure of Multiple-Dealer Equity and Government Securities Markets: How They Differ," Working Papers 02-9, Bank of Canada. [Downloadable!]
  7. Chris D'Souza, 2002. "A Market Microstructure Analysis of Foreign Exchange Intervention in Canada," Working Papers 02-16, Bank of Canada. [Downloadable!]
  8. Menkveld, Albert J. & Cheung, Yiu C. & Jong, Frank de, 2006. "Euro-Area Sovereign Yield Dynamics: the role of order imbalance," Serie Research Memoranda 0006, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
    Other versions:
  9. Burnside, A Craig & Eichenbaum, Martin & Kleshchelski, Isaac & Rebelo, Sérgio, 2006. "The Returns to Currency Speculation," CEPR Discussion Papers 5883, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Rafael Romeu, 2003. "An Intraday Pricing Model of Foreign Exchange Markets," IMF Working Papers 03/115, International Monetary Fund. [Downloadable!]
  11. Yiu Chung Cheung & Frank de Jong & Barbara Rindi, 2005. "Trading European sovereign bonds - the microstructure of the MTS trading platforms," Working Paper Series 432, European Central Bank. [Downloadable!]
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  12. Lasse H. Pedersen & Markus Brunnermeier, 2004. "Predatory Trading," Econometric Society 2004 North American Winter Meetings 425, Econometric Society. [Downloadable!]
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  13. Matthew Pritsker, 2005. "Large investors: implications for equilibrium asset, returns, shock absorption, and liquidity," Finance and Economics Discussion Series 2005-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  14. T. Clifton Green, 2004. "Economic News and the Impact of Trading on Bond Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1201-1234, 06. [Downloadable!] (restricted)
  15. Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business), . "How is Macro News Transmitted to Exchange Rates? (December 2003)," Working Papers gueconwpa~05-05-05, Georgetown University, Department of Economics. [Downloadable!]
  16. Albuquerque, Rui & Vega, Clara, 2006. "Asymmetric Information in the Stock Market: Economic News and Co-movement," CEPR Discussion Papers 5598, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  17. Rafael Romeu, 2004. "A Puzzle of Microstructure Market Maker Models," IMF Working Papers 04/6, International Monetary Fund. [Downloadable!]
  18. Chris D'Souza, 2002. "How Do Canadian Banks That Deal in Foreign Exchange Hedge Their Exposure to Risk?," Working Papers 02-34, Bank of Canada. [Downloadable!]
  19. Jacob Gyntelberg & Mico Loretan & Tientip Subhanij & Eric Chan, 2009. "Private information, stock markets, and exchange rates," BIS Working Papers 271, Bank for International Settlements. [Downloadable!]
  20. Fang Cai, 2003. "Was there front running during the LTCM crisis," International Finance Discussion Papers 758, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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