Foreign Exchange Volume

87 Pages Posted: 23 Aug 2017 Last revised: 15 Oct 2020

See all articles by Giovanni Cespa

Giovanni Cespa

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Antonio Gargano

University of Houston - C.T. Bauer College of Business

Steven Riddiough

University of Toronto

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Date Written: May 18, 2020

Abstract

We investigate the information contained in foreign exchange (FX) volume using a novel dataset from the over-the-counter market. We find volume helps predict next day currency returns and is economically valuable for currency investors. Predictability implies a stronger currency return reversal for currency pairs with abnormally low volume today, and is driven by the component of FX volume unrelated to volatility, illiquidity, and order flow. We rationalize these findings via a simple model of exchange rate determination, in which volume helps reveal the degree of asymmetric information in currency markets. Testing this prediction shows that asymmetric information is uniform across currency pairs but varies across instruments.

Keywords: foreign exchange volume, currency returns, asymmetric information

JEL Classification: F31, G12, G14, G15

Suggested Citation

Cespa, Giovanni and Gargano, Antonio and Riddiough, Steven and Sarno, Lucio, Foreign Exchange Volume (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3019870 or http://dx.doi.org/10.2139/ssrn.3019870

Giovanni Cespa

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44(0)2040708704 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Antonio Gargano

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Steven Riddiough (Contact Author)

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://www.stevenriddiough.com

Lucio Sarno

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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