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Does Foreign Exchange Volume Activity Predict Foreign Exchange Returns? Evidence from Buy-Sell Volume in the Euro-Dollar Market

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Listed:
  • David Spohn

Abstract

This paper investigates the predictive ability of lagged buy-sell volume on current foreign exchange returns. Using novel Euro-Dollar foreign exchange market data from 2007 to 2015, we show that the buy-sell volume has an inverse correlation with current foreign exchange returns. Using conditional regression analysis, buy-sell volumes predict subsequent Euro-Dollar returns. We divide the data into two sub-samples. We use the first sub-sample to create a trading rule, and we use the second sub-sample to test the rule. After adjusting for time-varying calendar effects, we find that a profitable trading strategy exists using only buy-sell volume to predict returns.

Suggested Citation

  • David Spohn, 2018. "Does Foreign Exchange Volume Activity Predict Foreign Exchange Returns? Evidence from Buy-Sell Volume in the Euro-Dollar Market," Applied Finance and Accounting, Redfame publishing, vol. 4(2), pages 15-28, August.
    • Handle: RePEc:rfa:afajnl:v:4:y:2018:i:2:p:15-28
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    References listed on IDEAS

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    1. Robert J. Shiller, 1987. "Investor Behavior in the October 1987 Stock Market Crash: Survey Evidence," NBER Working Papers 2446, National Bureau of Economic Research, Inc.
    2. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
    3. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
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    Cited by:

    1. David Spohn, 2018. "Bitcoin Poison? Anecdotal Evidence from Bitcoin Miners Revenue," Applied Economics and Finance, Redfame publishing, vol. 5(4), pages 150-159, July.

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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