Is There Private Information in the FX Market? The Tokyo Experiment

29 Pages Posted: 20 Sep 2000 Last revised: 22 Sep 2022

See all articles by Takatoshi Ito

Takatoshi Ito

University of Tokyo - Faculty of Economics; National Bureau of Economic Research (NBER); Ministry of Finance, Tokyo

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

Michael Melvin

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 1997

Abstract

It is a common view that private information in the foreign exchange market does not exist. We provide evidence against this view. The evidence comes from the introduction of trading in Tokyo over the lunch-hour. Lunch return variance doubles with the introduction of trading, which cannot be due to public information since the flow of public information did not change with the trading rules. Having eliminated public information as the cause, we exploit the volatility pattern over the whole day to discriminate between the two alternatives: private information and pricing errors. Three key results support the predictions of private-information models. First, the volatility U-shape flattens: greater revelation over lunch leaves a smaller share for the morning and afternoon. Second, the U-shape tilts upward, an implication of information whose private value is transitory. Finally, the morning exhibits a clear U-shape when Tokyo closes over lunch, and it disappears when trading is introduced.

Suggested Citation

Ito, Takatoshi and Lyons, Richard K. and Melvin, Michael and Melvin, Michael, Is There Private Information in the FX Market? The Tokyo Experiment (February 1997). NBER Working Paper No. w5936, Available at SSRN: https://ssrn.com/abstract=225717

Takatoshi Ito

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

National Bureau of Economic Research (NBER) ( email )

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Ministry of Finance, Tokyo ( email )

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Japan
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Richard K. Lyons (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-642-1059 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

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Michael Melvin

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

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

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Rady School of Management
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United States