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Profitability in an Electronic Foreign Exchange Market: Informed Trading or Differences in Valuation?

Author

Listed:
  • Ramazan Gencay

    (Department of Economics, Simon Fraser University)

  • Nikola Gradojevic

    (Faculty of Business Administration, Lakehead University)

  • Faruk Selcuk

    (Department of Economics, Bilkent University)

Abstract

Fundamental spot exchange rate models preclude the existence of asymmetric information in foreign exchange markets. This article critically investigates the possibility that private information arises in the spot foreign exchange market. Using a rich dataset, we first empirically detect transaction behavior consistent with the informed trading hypothesis. We then work within the theoretical framework of a high-frequency version of a structural microstructure trade model, which directly measures the market maker’s beliefs. We find that the time-varying pattern of the probability of informed trading is rooted in the strategic arrival of informed traders on a particular hour-of-day, day-of-week, or geographic location (market).

Suggested Citation

  • Ramazan Gencay & Nikola Gradojevic & Faruk Selcuk, 2009. "Profitability in an Electronic Foreign Exchange Market: Informed Trading or Differences in Valuation?," Working Paper series 25_09, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:25_09
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    Citations

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    Cited by:

    1. Sirimon Treepongkaruna & Robert Brooks & Stephen Gray, 2012. "Do trading hours affect volatility links in the foreign exchange market?," Australian Journal of Management, Australian School of Business, vol. 37(1), pages 7-27, April.
    2. Bekiros, Stelios D., 2015. "Heuristic learning in intraday trading under uncertainty," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 34-49.

    More about this item

    Keywords

    Foreign Exchange Markets; Volume; Informed Trading; Noise Trading;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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