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Foreign Exchange Volume

Author

Listed:
  • Sarno, Lucio
  • Cespa, Giovanni
  • Gargano, Antonio
  • Riddiough, Steven

Abstract

We investigate the information contained in foreign exchange (FX) volume using a novel dataset from the over-the-counter market. We find that volume helps predict next day currency returns and is economically valuable for currency investors. Predictability implies a stronger currency return reversal for currency pairs with abnormally low volume today, and is driven by the component of FX volume unrelated to volatility, illiquidity, and order flow. We rationalize these findings via a simple model of exchange rate determination, in which volume helps reveal the degree of asymmetric information in currency markets. Testing this prediction shows that asymmetric information is uniform across currency pairs but varies across instruments.

Suggested Citation

  • Sarno, Lucio & Cespa, Giovanni & Gargano, Antonio & Riddiough, Steven, 2021. "Foreign Exchange Volume," CEPR Discussion Papers 16128, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16128
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    Cited by:

    1. Aldo Barrios & Rob Franolic & Davide Giovanardi & Michael Melvin, 2022. "Trading with the Informed and against the Uninformed: Flows and Positioning in the Global Currency Market," CESifo Working Paper Series 9921, CESifo.
    2. Leonie Bräuer & Harald Hau, 2022. "Can Time-Varying Currency Risk Hedging Explain Exchange Rates?," CESifo Working Paper Series 10065, CESifo.
    3. Ranaldo, Angelo & de Magistris, Paolo Santucci, 2022. "Liquidity in the global currency market," Journal of Financial Economics, Elsevier, vol. 146(3), pages 859-883.

    More about this item

    Keywords

    Foreign exchange volume; Currency returns; Asymmetric information;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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