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Heterogeneous Information Content of Global FX Trading

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  • Angelo Ranaldo

    ()

  • Fabricius Somogyi

    ()

Abstract

This work studies the information content of trades in the world'slargest over-the-counter (OTC) market, the foreign exchange (FX) market. It analyses a novel, comprehensive order flow dataset, distinguishing amongst different groups of market participants and covering a large cross-section of currency pairs. Both the contemporary and permanent price impact are heterogeneous across agents, time and currency pairs, consistent with the asymmetric information theory and OTC market fragmentation. A trading strategy based on the permanent price impact, capturing superior information, generates high returns even after accounting for risk, transaction costs and other common risk factors documented in the FX literature.

Suggested Citation

  • Angelo Ranaldo & Fabricius Somogyi, 2018. "Heterogeneous Information Content of Global FX Trading," Working Papers on Finance 1820, University of St. Gallen, School of Finance, revised Apr 2019.
  • Handle: RePEc:usg:sfwpfi:2018:20
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    Keywords

    Asymmetric information; Currency portfolios; Heterogeneity; Order flow; OTC; Price discovery;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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