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Marketwide Private Information in Stocks: Forecasting Currency Returns

Author

Listed:
  • RUI ALBUQUERQUE
  • EVA DE FRANCISCO
  • LUIS B. MARQUES

Abstract

We present a model of equity trading with informed and uninformed investors where informed investors trade on firm‐specific and marketwide private information. The model is used to identify the component of order flow due to marketwide private information. Estimated trades driven by marketwide private information display little or no correlation with the first principal component in order flow. Indeed, we find that co‐movement in order flow captures variation mostly in liquidity trades. Marketwide private information obtained from equity market data forecasts industry stock returns, and also currency returns.

Suggested Citation

  • Rui Albuquerque & Eva De Francisco & Luis B. Marques, 2008. "Marketwide Private Information in Stocks: Forecasting Currency Returns," Journal of Finance, American Finance Association, vol. 63(5), pages 2297-2343, October.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:5:p:2297-2343
    DOI: 10.1111/j.1540-6261.2008.01398.x
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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