Asymmetric Information Risk in FX Markets
140 Pages Posted: 18 Dec 2018 Last revised: 3 Feb 2020
Date Written: December 10, 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. 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 costs and other common risk factors documented in the FX literature.
Keywords: Asymmetric information, Currency portfolios, Order flow, OTC, Price discovery
JEL Classification: G12, G15, F31
Suggested Citation: Suggested Citation