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Trading activity and exchange rates in high-frequency EBS data

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The absence of data has, until now, precluded virtually all research on trading volume in the foreign exchange market. This paper introduces a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market. The dataset gives volumes and prices at the one-minute frequency over a five-year time period in the euro-dollar and dollar-yen currency pairs. We first document intraday volume patterns in euro-dollar and dollar-yen trading, noting the effects of macroeconomic news announcements but also purely institutional factors. We study the effects of UK-specific holidays on euro-dollar and dollar-yen trading volume and find that these holidays cause a sharp decline in trading volume even among dealers outside the UK, a natural experiment that we interpret as further evidence that trading activity is not driven solely by the flow of news about fundamentals. Studying the reaction to U.S. macroeconomic announcements, we show that a sharp pickup in trading volume generally occurs in the minutes following news announcements. This rise in trading volume happens even if the data release is entirely in line with market expectations, and it is often negatively related to the dispersion of ex-ante market expectations. Finally, focusing on one particular data release at the one-second frequency, we document a two-stage reaction whereby the price jumps immediately after the announcement without much trading volume, while trading volume and volatility then surge about 15 seconds after the data release.

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  • Alain P. Chaboud & Sergey V. Chernenko & Jonathan H. Wright, 2007. "Trading activity and exchange rates in high-frequency EBS data," International Finance Discussion Papers 903, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:903
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    Cited by:

    1. Kentaro Iwatsubo & Yoshihiro Kitamura, 2008. "Intraday Evidence of the Informational Efficiency of the Yen/Dollar Exchange Rate," Discussion Papers 0801, Graduate School of Economics, Kobe University.
    2. Ranaldo, Angelo & de Magistris, Paolo Santucci, 2022. "Liquidity in the global currency market," Journal of Financial Economics, Elsevier, vol. 146(3), pages 859-883.
    3. Chang, Ya-Ting & Gau, Yin-Feng & Hsu, Chih-Chiang, 2017. "Liquidity Commonality in Foreign Exchange Markets During the Global Financial Crisis and the Sovereign Debt Crisis: Effects of Macroeconomic and Quantitative Easing Announcements," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 172-192.

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    Keywords

    Foreign exchange rates; Trade;

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