Informational Linkages Across Trading Regions: Evidence from Foreign Exchange Markets
47 Pages Posted: 8 Mar 2007
Date Written: March 2006
This paper studies informational linkages in the foreign exchange market across trading regions for the euro-dollar and dollar-yen currency pairs, using high-frequency intraday data from Electronic Broking Services (EBS). In contrast with previous studies that use indicative quote frequency to proxy for trading activity, we use actual regional trading volume to identify five distinct trading regions in the foreign exchange market: Asia Pacific, the Asia-Europe overlap, Europe, the Europe-America overlap, and America. We study spillovers in five proxies for information, including return, direction of return, volatility, trading activity (trading volume and number of transactions), and order flow, across the five trading regions. Based on our regional model for each proxy variable, we find statistically significant evidence for informational linkages at both the own-region and the inter-region levels, but the economic significance of own-region spillovers is much more important than that of inter-region spillovers, especially for volatility and trading activity. In addition, order flow spillovers from the Europe-America overlap trading region are the most important source of spillovers to other trading regions for both currency pairs.
Keywords: exchange rate, volatility, trading activity, trading volume, order flow, high-frequency data
JEL Classification: F31, G15
Suggested Citation: Suggested Citation