Information Flows in Dark Markets: Dissecting Customer Currency Trades
Leibniz Universitaet Hannover - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)
City University London - Sir John Cass Business School
Bank for International Settlements (BIS) - Monetary and Economic Department
March 5, 2013
We study the information in order flows of different customer segments in the world's largest over-the-counter market, the foreign exchange market. The analysis draws on a unique dataset covering a broad cross-section of currency pairs and distinguishing trades by key types of foreign exchange end-users. We find that order flows are highly informative about future exchange rates and provide significant economic value for the few large dealers who have access to these flows. Moreover, customer groups systematically engage in risk sharing with each other and differ markedly in their predictive ability, trading styles, and risk exposure.
Number of Pages in PDF File: 76
Keywords: Order Flow, Foreign Exchange Risk Premia, Heterogeneous Information, Carry Trades, Hedge Funds
JEL Classification: F31, G12, G15working papers series
Date posted: May 20, 2012 ; Last revised: April 5, 2013
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