Asymmetric Information and Price Discovery in the FX Market: Does Tokyo Know More About the Yen?

Arizona State University Working Paper No. 98/1

35 Pages Posted: 19 Feb 1999

See all articles by Vicentiu Covrig

Vicentiu Covrig

California State University, Northridge - Department of Finance, Financial Planning and Insurance

Michael Melvin

University of California, San Diego (UCSD) - Rady School of Management; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 1998

Abstract

We identify a period in the foreign exchange market when there is a high concentration of informed yen/dollar traders active in Tokyo. We exploit the data during this period to test implications of market-microstructure theory. Comparing the period of informed trader clustering to a similar period without the informed, we find the following results:

1. Exchange rate quotes adjust to full-information levels six times faster when the informed are active than when they are not.

2. Japanese quotes tend to lead the rest of the market when the informed are active. At other times, two-way causality is observed in quotes.

3. The contribution of Japanese quotes to yen/dollar price discovery relative to quotes of the rest-of-the-world is 5 to 12 percentage points higher when the informed are active compared to when they are absent.

These results are consistent with a view of the foreign exchange market where private information is at times quite important, yet "normal" times are characterized as periods where public information, shared equally by all, results in a high contemporaneous correlation across quotes, regardless of origin.

JEL Classification: F3

Suggested Citation

Covrig, Vicentiu and Melvin, Michael, Asymmetric Information and Price Discovery in the FX Market: Does Tokyo Know More About the Yen? (February 1998). Arizona State University Working Paper No. 98/1. Available at SSRN: https://ssrn.com/abstract=138495 or http://dx.doi.org/10.2139/ssrn.138495

Vicentiu Covrig

California State University, Northridge - Department of Finance, Financial Planning and Insurance ( email )

Northridge, CA 91330-8379
United States

Michael Melvin (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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