Speculator Activity and Cross-Asset Predictability of FX Returns

46 Pages Posted: 30 Jul 2018 Last revised: 12 Jul 2019

See all articles by Anton Hasselgren

Anton Hasselgren

Stockholm University - Stockholm Business School

Jarkko Peltomäki

Stockholm University - Stockholm Business School

Michael Graham

Stockholm University - School of Business

Date Written: July 11, 2019

Abstract

The gradual information diffusion hypothesis (GIDH) suggests that information flows slowly across investors and asset markets and thus generates return predictability. We examine cross-asset return predictability of FX market strategies. Apply the GIDH to empirically investigate the role of speculator activity in cross-asset return predictability of FX market strategies. We hypothesize that when speculators in the FX market are active, the speed of information diffusion into the market increases which, invariably, weaken predictability between the equity and commodity market and FX strategies. Our reported results, which provide strong support for this view, show that when speculators are active in the FX market, predictability from the equity market dissipates and predictability from the commodity market diminishes. Our findings suggest that speculators play a vital role in enhancing informational efficiency in the FX market.

Suggested Citation

Hasselgren, Anton and Peltomäki, Jarkko and Graham, Michael, Speculator Activity and Cross-Asset Predictability of FX Returns (July 11, 2019). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3222067 or http://dx.doi.org/10.2139/ssrn.3222067

Anton Hasselgren (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

Jarkko Peltomäki

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

Michael Graham

Stockholm University - School of Business ( email )

Roslagsvägen 1010
Stockholm, SE-106 91
Sweden
+ 46 8 674 7451 (Phone)

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