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Information Flows in Dark Markets: Dissecting Customer Currency TradesLukas MenkhoffLeibniz Universitaet Hannover - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Lucio SarnoCity University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR) Maik SchmelingCity University London - Sir John Cass Business School Andreas SchrimpfBank for International Settlements (BIS) - Monetary and Economic Department March 5, 2013 Abstract: 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, G15 working papers seriesDate posted: May 20, 2012 ; Last revised: April 5, 2013Suggested CitationContact Information
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