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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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  • 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. 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.
    2. 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.
    3. 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.
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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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    More about this item

    Keywords

    foreign exchange; behavioral finance; currency returns; investment;
    All these keywords.

    JEL classification:

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

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