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  • H. Henry Cao

    (Kenan-Flager School of Business, University of North Carolina)

  • Martin D. Evans

    (Georgetown University and National Bureau of Economic Research)

  • Richard K. Lyons

    (Haas School of Business, University of California, Berkeley, and National Bureau of Economic Research)

When information about fundamentals is symmetric, can information-based trade still arise? Consider bond and foreign exchange (FX) markets, where private information about nominal cash flows is generally absent, but participants are convinced that superior information exists. We analyze a class of asymmetric information—inventory information—that is unrelated to fundamentals but still forecasts future price (by forecasting future discount factors). We find that inventory information in FX does indeed forecast discount factors and does so over both short and long horizons. The permanent effect from inventory information ranges between 15% and 30% of that from public information.

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File URL: http://dx.doi.org/10.1086/497413
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Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 79 (2006)
Issue (Month): 1 (January)
Pages: 325-364

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Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:325-364
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