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Informativeness of trade size in foreign exchange markets

Author

Listed:
  • Gradojevic, Nikola
  • Erdemlioglu, Deniz
  • Gençay, Ramazan

Abstract

This article investigates a trading strategy that relies on private information in an electronic spot foreign exchange market. In a structural microstructure model extended for high-frequency data, our analysis links the informational content of trading activity to order size. We find that large currency orders are likely to be placed by informed traders during increased price volatility episodes. In addition, the data suggest that excess kurtosis in exchange rate returns (corresponding to large price-contingent trades) is significantly lower than that in small trades.

Suggested Citation

  • Gradojevic, Nikola & Erdemlioglu, Deniz & Gençay, Ramazan, 2017. "Informativeness of trade size in foreign exchange markets," Economics Letters, Elsevier, vol. 150(C), pages 27-33.
  • Handle: RePEc:eee:ecolet:v:150:y:2017:i:c:p:27-33
    DOI: 10.1016/j.econlet.2016.11.010
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    References listed on IDEAS

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    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Nihad Aliyev & Xue-Zhong He, 2017. "Ambiguous Market Making," Research Paper Series 383, Quantitative Finance Research Centre, University of Technology, Sydney.

    More about this item

    Keywords

    Foreign exchange markets; Volume; Trade size; Volatility; Informed trading; Noise trading; Market microstructure;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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