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Private information and its origins in an electronic foreign exchange market

  • Gençay, Ramazan
  • Gradojevic, Nikola

We study the risk of informed trading in an electronic foreign exchange market and test whether informed trading is driven by marketwide private information. Our framework is based on a structural microstructure trade model that measures the market makers' beliefs directly. Evidence of high concentration of informed trades is found to be inversely related to the overall 24-hour trading activity, i.e., early morning and late afternoon GMT rounds of trading involve the highest risk of informed trading. We structurally identify that the trades due to region-specific private information are dominant and explain between 5 and 25% of the variation in currency returns. In contrast, marketwide private information explains only about 1–5% of the variation in returns.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 33 (2013)
Issue (Month): C ()
Pages: 86-93

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Handle: RePEc:eee:ecmode:v:33:y:2013:i:c:p:86-93
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