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Informational Integration and FX Trading

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Abstract

This paper addresses international financial integration in a new way. We focus on informational integration, specifically, the importance of information conveyed by order flow in major currencies for pricing minor currencies. We develop a multi-currency model of portfolio allocation in the presence of dispersed information. We then test the model's implications using four months of concurrent transaction data on nine currencies. The model explains 45 to 78 percent of daily returns in all nine currencies. Moreover, its prediction that order flow in individual markets should be relevant for determining prices in other markets is borne out.

Suggested Citation

  • Martin Evans and Richard K. Lyons, 2002. "Informational Integration and FX Trading," Working Papers gueconwpa~02-02-11, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~02-02-11
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    More about this item

    Keywords

    Exchange Rates; Order flow; Financial Integration;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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