Asymmetric Information Risk in FX Markets

137 Pages Posted: 16 Oct 2018 Last revised: 28 May 2020

See all articles by Angelo Ranaldo

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - School of Finance

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 dataset, distinguishing amongst 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), Forthcoming. 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

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Fabricius Somogyi

University of St. Gallen ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
447
Abstract Views
2,324
rank
69,257
PlumX Metrics