Asymmetric Information in the Interbank Foreign Exchange Market
30 Pages Posted: 17 Feb 2009 Last revised: 4 May 2010
Date Written: February 15, 2009
This paper provides evidence of private information in the interbank foreign exchange market. Our trading data are unique because they include trading-party identities and because they comprehensively include all interbank trading venues. We find that larger banks have more information than smaller banks and that the relation between order flow and returns is stronger for larger banks than smaller banks. This, in turn, implies that information is an important reason for the positive relation between order flow and returns. We also find that limit orders sometimes carry information and that large-bank limit orders are relatively well-informed.
Keywords: foreign exchange, microstructure, asymmetric information, liquidity premium
JEL Classification: G15, F31, F3
Suggested Citation: Suggested Citation