Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades
89 Pages Posted: 12 Apr 2013
Date Written: March 5, 2013
We study the information in order flows in the world’s largest over-the-counter market, the foreign exchange market. The analysis draws on a data set covering a broad cross-section of currencies and different customer segments of foreign exchange endusers. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.
Keywords: Order Flow, Foreign Exchange Risk Premia, Heterogeneous Information, Carry Trades
JEL Classification: F31, G12, G15
Suggested Citation: Suggested Citation