The Impact of Different Players on the Volume-Volatility Relation in the Foreign Exchange Market

23 Pages Posted: 6 Mar 2007

See all articles by Geir Hoidal Bjonnes

Geir Hoidal Bjonnes

The Norwegian School of Management BI

Dagfinn Rime

BI Norwegian Business School

Haakon Solheim

Norges Bank

Date Written: March 1, 2007

Abstract

We examine the volume-volatility relation in the foreign exchange (FX) market using a unique data set from the Swedish krona (SEK) market that contains observations of 90-95 percent of all transactions from 1995 until 2002. We show that the strength of the volume-volatility relation depends on the group of market participants trading. Financial trading volume has the highest correlation with volatility. Interbank trading between the largest Market making banks is also positively correlated with volatility, while trading among Other market making banks show no correlation with volatility. Trading by Non-Financial customers is not correlated with volatility at all when controlling for trading by other market participants. Interestingly, we show that (unexpected) spot volume and changes in net positions (spot and forward) by Financial customers Granger cause spot volume and changes in net positions by Non-Financial customers. Our results clearly show that market participants in the FX market are heterogenous, suggesting that differences in trading strategies and information may explain the volume-volatility relation.

Keywords: Volume-volatility relation, microstructure, exchange rates

JEL Classification: F31

Suggested Citation

Bjonnes, Geir Hoidal and Rime, Dagfinn and Solheim, Haakon O., The Impact of Different Players on the Volume-Volatility Relation in the Foreign Exchange Market (March 1, 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=967749 or http://dx.doi.org/10.2139/ssrn.967749

Geir Hoidal Bjonnes (Contact Author)

The Norwegian School of Management BI ( email )

Nydalsveien 37
Oslo, 0484
Norway
+47 46410502 (Phone)

HOME PAGE: http://www.bi.no/BI/AcademicProfile____37601.aspx?ansattid=/fgl96014

Dagfinn Rime

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
+47-46410507 (Phone)

HOME PAGE: http://home.bi.no/dagfinn.rime/

Haakon O. Solheim

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

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