Hedge Funds and the Origins of Private Information in Currency Markets

30 Pages Posted: 10 Oct 2009

See all articles by Carol L. Osler

Carol L. Osler

Brandeis University - International Business School

Vitaliy Vandrovych

State Street Global Advisors, ARC; State Street Global Advisors, Advanced Research Center

Date Written: April 2009

Abstract

This paper provides evidence that hedge funds are a critical source of private fundamental information in currency markets. We analyze the most disaggregated database of currency transactions to date, with ten different categories of market participants including six categories of end users. Our analysis of the information content of individual trades indicates that only one category of end user has information, specifically hedge funds. Orders placed by institutional investors, broker-dealers, central banks and government agencies, large corporations, and middle-market corporations provide little information about upcoming returns. Orders of banks in every size category carry information, consistent with now-standard theory that banks gather information from observing customer trades. Theory does not indicate whether banks should be better informed than their customers. Our results suggest that banks are better informed than their individual customers, possibly because they aggregate information from many customers.

Keywords: microstructure, exchange rates, asymmetric information

Suggested Citation

Osler, Carol L. and Vandrovych, Vitaliy, Hedge Funds and the Origins of Private Information in Currency Markets (April 2009). Available at SSRN: https://ssrn.com/abstract=1484711 or http://dx.doi.org/10.2139/ssrn.1484711

Carol L. Osler (Contact Author)

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States
781-736-4826 (Phone)

Vitaliy Vandrovych

State Street Global Advisors, ARC ( email )

20 Churchill Place
Canary Wharf
London, London E14 5HJ
United Kingdom
44 (0) 2033956209 (Phone)

State Street Global Advisors, Advanced Research Center ( email )

20 Churchill Place
Canary Wharf
London, London E14 5HJ
United Kingdom
44 (0) 2033956209 (Phone)

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