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Information flows in foreign exchange markets: dissecting customer currency trades

Accepted version
Peer-reviewed

Type

Article

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Authors

Menkhoff, L 
Schmeling, M 
Schrimpf, A 

Abstract

© 2016 the American Finance Association. We study the information in order flows in the world's largest over-the-counter market, the foreign exchange (FX) market. The analysis draws on a data set covering a broad cross-section of currencies and different customer segments of FX end-users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.

Description

Keywords

Order Flow, Foreign Exchange Risk Premia, Heterogeneous Information, Carry Trades

Journal Title

The Journal of Finance

Conference Name

Journal ISSN

0022-1082
1540-6261

Volume Title

71

Publisher

Wiley-Blackwell