Measuring the Information Content of Customer Foreign Exchange Orders

Posted: 22 Jun 2014

See all articles by Sviatoslav Rosov

Sviatoslav Rosov

London School of Economics & Political Science (LSE) - Department of Finance

F. Douglas Foster

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Date Written: May 12, 2014

Abstract

This paper investigates whether customer order flow conveys information about future foreign exchange (FX) prices. We use a unique data set from a leading Australian commercial bank that records every FX trade made by the bank in the spot Australian dollar/US dollar market between 2005 and 2010. We find little evidence in support of a cointegrating relation or a statistically significant correlation between customer order flow and FX returns. However, consistent with the liquidity provision role of non-financial customers in Evans and Lyons ((2002) Order flow and exchange rate dynamics. Journal of Political Economy 110: 170-180), we find a statistically significant negative correlation between order flow from the diversified economic sector and FX returns. A dynamic analysis suggests that order flow has little or no price impact on FX returns. These results suggest that the non-financial customer order flow of a commercial bank does not carry information about FX prices.

Keywords: Customer orders, foreign exchange, information flows

Suggested Citation

Rosov, Sviatoslav and Foster, F. Douglas, Measuring the Information Content of Customer Foreign Exchange Orders (May 12, 2014). Australian Journal of Management, Vol. 39, No. 2, 2014, Available at SSRN: https://ssrn.com/abstract=2457117

Sviatoslav Rosov (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

London, WC2A 2AE
United Kingdom

F. Douglas Foster

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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