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Foreign exchange volume

Accepted version
Peer-reviewed

Type

Article

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Authors

Cespa, G 
Gargano, A 
Riddiough, SJ 

Abstract

We investigate the information contained in foreign exchange (FX) volume using a novel dataset from the over-the-counter market. We find that volume helps predict next day currency returns and is economically valuable for currency investors. Predictability implies a stronger currency return reversal for currency pairs with abnormally low volume today, and is driven by the component of FX volume unrelated to volatility, illiquidity, and order flow. We rationalize these findings via a simple model of exchange rate determination, in which volume helps reveal the degree of asymmetric information in currency markets. Testing this prediction shows that asymmetric information is uniform across currency pairs but varies across instruments.

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Keywords

Journal Title

The Review of Financial Studies

Conference Name

Journal ISSN

0893-9454
1465-7368

Volume Title

Publisher

Oxford University Press (OUP)

Rights

All rights reserved
Sponsorship
We thank the Accounting & Finance Association of Australia and New Zealand for generous financial support
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