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Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades

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  • LUKAS MENKHOFF
  • LUCIO SARNO
  • MAIK SCHMELING
  • ANDREAS SCHRIMPF

Abstract

We study the information in order flows in the world's largest over-the-counter market, the foreign exchange market. The analysis draws on a data set covering a broad cross-section of currencies and different customer segments of foreign exchange end-users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.
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  • Lukas Menkhoff & Lucio Sarno & Maik Schmeling & Andreas Schrimpf, 2016. "Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades," Journal of Finance, American Finance Association, vol. 71(2), pages 601-634, April.
  • Handle: RePEc:bla:jfinan:v:71:y:2016:i:2:p:601-634
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    3. Banti, Chiara & Phylaktis, Kate, 2015. "FX market liquidity, funding constraints and capital flows," Journal of International Money and Finance, Elsevier, vol. 56(C), pages 114-134.
    4. Buncic, Daniel & Piras, Gion Donat, 2016. "Heterogeneous agents, the financial crisis and exchange rate predictability," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 313-359.
    5. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    6. Carol Osler & Alasdair Turnbull, 2016. "Dealer Trading at the Fix," Working Papers 101R, Brandeis University, Department of Economics and International Businesss School, revised Jun 2017.
    7. MacDonald, Ronald & Nagayasu, Jun, 2015. "Currency forecast errors and carry trades at times of low interest rates: Evidence from survey data on the yen/dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 1-19.
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    9. Pietro Bonaldi & Mauricio Villamizar-Villegas, 2018. "An Auction-Based Test of Private Information in an Interdealer FX Market," Borradores de Economia 1049, Banco de la Republica de Colombia.
    10. Schreiber, Ben Z., 2014. "Identifying speculators in the FX market: A microstructure approach," Journal of Economics and Business, Elsevier, vol. 73(C), pages 97-119.
    11. Cheng, Lian & Luo, Junru & Liu, Lin, 2018. "Is Renminbi a (Truly) International Currency? An Evaluation Based on Offshore Foreign Exchange Market Trading Patterns," MPRA Paper 89279, University Library of Munich, Germany.
    12. Piccotti, Louis R. & Schreiber, Ben Z., 2015. "Information shares of two parallel currency options markets: Trading costs versus transparency/tradability," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 210-229.
    13. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2014. "The role of education in equity portfolios during the recent financial crisis," SIRE Discussion Papers 2015-26, Scottish Institute for Research in Economics (SIRE).
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    15. Lock, Eduardo & Winkelried, Diego, 2015. "Flujos de órdenes en el mercado cambiario y el valor intrínseco del Nuevo Sol," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 29, pages 33-54.
    16. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2014. "Modeling Dependence Structure and Forecasting Portfolio Value-at-Risk with Dynamic Copulas," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-25, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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