City Research Online

Foreign Exchange Volume

Cespa, G. ORCID: 0000-0003-2466-6168, Gargano, A., Riddiough, S. J. and Sarno, L. ORCID: 0000-0003-1279-9748 (2021). Foreign Exchange Volume (DP16128). London, UK: CEPR.

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: Monograph (Discussion Paper)
Publisher Keywords: foreign exchange volume, currency returns, asymmetric information
Subjects: H Social Sciences > HG Finance
Departments: Business School > Finance
Date available in CRO: 24 May 2021 10:58
Date of first online publication: 8 May 2021
URI: https://openaccess.city.ac.uk/id/eprint/26188
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