Marketwide Private Information in Stocks: Forecasting Currency Returns

49 Pages Posted: 5 Jul 2006  

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Eva de Francisco

Congressional Budget Office (CBO) - Macroeconomic Analysis Division

Luis Brandao Marques

International Monetary Fund - Monetary and Capital Markets Department

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

We present a model of equity trading with informed and uninformed investors where informed investors act upon firm-specific private information and marketwide private information. The model is used to structurally identify the component of order flow that is due to marketwide private information. Trades driven by marketwide private information display very little or no correlation with the first principal component of order flow. This finding implies that a simple statistical factor is a poor measure of marketwide private information. Moreover, the model suggests that the previously documented comovement in order flow captures mostly common variation in liquidity trades. We find that marketwide private information obtained from equity market data forecasts industry stock returns and foreign exchange returns consistent with Evans and Lyons' (2004a) model of exchange rate determination.

Keywords: Marketwide private information, firm-specific private information, order flow, principal components, currency returns, equity returns

JEL Classification: F31, G11, G14

Suggested Citation

Albuquerque, Rui A. and de Francisco, Eva and Brandao Marques, Luis, Marketwide Private Information in Stocks: Forecasting Currency Returns (April 2006). CEPR Discussion Paper No. 5604. Available at SSRN: https://ssrn.com/abstract=913077

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Eva De Francisco

Congressional Budget Office (CBO) - Macroeconomic Analysis Division ( email )

2nd and D Streets, SW
Washington, DC 18042
United States

Luis Brandao Marques

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States
2026238308 (Phone)
2025898308 (Fax)

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