Asymmetric Information Risk in FX Markets

138 Pages Posted: 16 Oct 2018 Last revised: 17 Jun 2021

See all articles by Angelo Ranaldo

Angelo Ranaldo

University of St. Gallen

Fabricius Somogyi

University of St. Gallen

Date Written: April 6, 2020

Abstract

This work studies the information content of trades in the world’s largest over-the-counter (OTC) market, the foreign exchange (FX) market. It analyses a novel, comprehensive order flow data set, distinguishing among different groups of market participants and covering a large cross-section of currency pairs. We find compelling evidence of heterogeneous superior information across agents, time, and currency pairs, consistent with the asymmetric information theory and OTC market fragmentation. A trading strategy based on the permanent price impact, capturing asymmetric information risk, generates high returns even after accounting for risk, transaction cost, and other common risk factors documented in the FX literature.

Keywords: Asymmetric information, Currency portfolios, Order flow, OTC, Risk premium

JEL Classification: G12, G15, F31

Suggested Citation

Ranaldo, Angelo and Somogyi, Fabricius, Asymmetric Information Risk in FX Markets (April 6, 2020). Journal of Financial Economics (JFE), Volume 140, Issue 2, May 2021, Pages 391-411, Available at SSRN: https://ssrn.com/abstract=3263279 or http://dx.doi.org/10.2139/ssrn.3263279

Angelo Ranaldo (Contact Author)

University of St. Gallen ( email )

Swiss Institute of Banking and Finance s/bf-HSG
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx

Fabricius Somogyi

University of St. Gallen ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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