Foreign Exchange Volume

90 Pages Posted: 14 May 2021

See all articles by Giovanni Cespa

Giovanni Cespa

Bayes Business School; Bayes Business School; Centre for Economic Policy Research (CEPR)

Antonio Gargano

University of Houston - C.T. Bauer College of Business

Steven Riddiough

University of Toronto - Rotman School of Management; University of Toronto at Scarborough - Division of Management

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2021

Abstract

We investigate the information contained in foreign exchange (FX) volume using a novel dataset from the over-the-counter market. We find that volume helps predict next day currency returns and is economically valuable for currency investors. Predictability implies a stronger currency return reversal for currency pairs with abnormally low volume today, and is driven by the component of FX volume unrelated to volatility, illiquidity, and order flow. We rationalize these findings via a simple model of exchange rate determination, in which volume helps reveal the degree of asymmetric information in currency markets. Testing this prediction shows that asymmetric information is uniform across currency pairs but varies across instruments.

JEL Classification: F31, G12, G14, G15

Suggested Citation

Cespa, Giovanni and Cespa, Giovanni and Gargano, Antonio and Riddiough, Steven and Riddiough, Steven and Sarno, Lucio, Foreign Exchange Volume (May 1, 2021). CEPR Discussion Paper No. DP16128, Available at SSRN: https://ssrn.com/abstract=3846241

Giovanni Cespa (Contact Author)

Bayes Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44(0)2040708704 (Phone)

Bayes Business School ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Antonio Gargano

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Steven Riddiough

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Scarborough - Division of Management ( email )

1265 Military Trial
Scarborough, Ontario M1C 1A4
Canada

Lucio Sarno

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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