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Foreign exchange volume

Cespa, G. ORCID: 0000-0003-2466-6168, Gargano, A., Riddiough, S. and Sarno, L. (2021). Foreign exchange volume. The Review of Financial Studies, doi: 10.1093/rfs/hhab095

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.

Publication Type: Article
Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Financial Studies following peer review. The version of record, Giovanni Cespa, Antonio Gargano, Steven J Riddiough, Lucio Sarno, Foreign Exchange Volume, The Review of Financial Studies, 2021, is available online at:https://doi.org/10.1093/rfs/hhab095.
Publisher Keywords: foreign exchange volume, currency returns, asymmetric information
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Date available in CRO: 12 May 2021 12:57
Date deposited: 12 May 2021
Date of acceptance: 5 May 2021
Date of first online publication: 30 August 2021
URI: https://openaccess.city.ac.uk/id/eprint/26131
[img] Text - Accepted Version
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