Heterogeneous Information Content of Global FX Trading
60 Pages Posted: 16 Oct 2018 Last revised: 19 Apr 2019
Date Written: April 04, 2019
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. Both the contemporary and permanent price impact are heterogeneous 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 superior information, generates high returns even after accounting for risk, transaction costs and other common risk factors documented in the FX literature.
Keywords: Asymmetric information, Currency portfolios, Heterogeneity, Order flow, OTC, Price discovery
JEL Classification: G12, G15, F31
Suggested Citation: Suggested Citation