Volume and Excess Returns in Foreign Exchange
65 Pages Posted: 23 Aug 2017 Last revised: 8 Nov 2018
Date Written: November 7, 2018
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
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