Volume and Excess Returns in Foreign Exchange

65 Pages Posted: 23 Aug 2017 Last revised: 8 Nov 2018

See all articles by Antonio Gargano

Antonio Gargano

University of Melbourne - Department of Finance

Steven J. Riddiough

University of Melbourne

Lucio Sarno

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

Date Written: November 7, 2018

Abstract

We investigate the information content of foreign exchange (FX) volume using a novel dataset that offers broad coverage of FX volume across spot, forward and swap market instruments. We find that FX volume embeds predictive information for future currency excess returns, which experience stronger reversals when volume decreases. This is consistent with theories of volume which predict that more informed trading is associated with higher volume and weaker reversals in returns. These results have important implications both for dealers seeking to understand the returns to liquidity provision in FX markets, and for global investors pursuing novel sources of return predictability.

Keywords: foreign exchange volume, informed trading, return reversal, transaction costs

JEL Classification: F31, G12, G14, G15

Suggested Citation

Gargano, Antonio and Riddiough, Steven J. and Sarno, Lucio, Volume and Excess Returns in Foreign Exchange (November 7, 2018). Available at SSRN: https://ssrn.com/abstract=3019870 or http://dx.doi.org/10.2139/ssrn.3019870

Antonio Gargano

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Steven J. Riddiough (Contact Author)

University of Melbourne ( email )

Faculty of Business and Economics
Level 12 198 Berkeley Street
Melbourne, Victoria 3010
Australia
+61 (0)3834 40044 (Phone)

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

Lucio Sarno

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

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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