Private Information, Stock Markets, and Exchange Rates

29 Pages Posted: 29 Jul 2009

See all articles by Jacob Gyntelberg

Jacob Gyntelberg

Nordea Group; University of Copenhagen - Department of Economics

Mico Loretan

Swiss National Bank

Tientip Subhanij

Bank of Thailand

Eric Ho Pan Chan

Bank for International Settlements (BIS)

Date Written: February 1, 2009

Abstract

Explaining exchange rates has long been an important but vexing issue in international economics and finance. In recent years, a number of studies have shown that investors' private information plays a central role in determining exchange rates. We demonstrate in this paper that the private information of investors relevant for exchange rates is largely connected to the stock market, and that this information is conveyed to foreign exchange (FX) markets by order flow that is induced by investors' transactions in the stock market. We establish these results by analyzing several novel unused datasets on nearly two years' worth of daily-frequency capital flows of nonresident investors in the foreign exchange, stock, and bond markets of Thailand. We present compelling evidence that FX order flow that is induced by nonresident investors transactions in the Stock Exchange of Thailand, which we show are driven largely by private information, has far greater explanatory power for the exchange rate than other order flow has, both in the short run and the long run. In contrast, FX order flow of nonresident investors that is related to their transactions in Thai government bonds, which we find are not driven appreciably by private information, does not have a statistically significant effect on the exchange rate.

Keywords: Exchange rate models, market microstructure approach, asymmetric information, Thailand, generated regressors, impulse response functions, I(1) measurement error

JEL Classification: C22, E58, F31, F37, G14

Suggested Citation

Gyntelberg, Jacob and Loretan, Mico and Subhanij, Tientip and Chan, Eric Ho Pan, Private Information, Stock Markets, and Exchange Rates (February 1, 2009). BIS Working Paper No. 271. Available at SSRN: https://ssrn.com/abstract=1438504 or http://dx.doi.org/10.2139/ssrn.1438504

Jacob Gyntelberg (Contact Author)

Nordea Group ( email )

Grønjordsvej 10
Copenhagen, DK - 2300
Denmark

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

Mico Loretan

Swiss National Bank ( email )

Fraumuensterstr. 8
Zuerich, 8022
Switzerland

Tientip Subhanij

Bank of Thailand ( email )

273 Samsen Road
Bangkhunprom, Bangkok 10200
United States

Eric Ho Pan Chan

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
115
Abstract Views
817
rank
237,482
PlumX Metrics