Asymmetric Information in the Interbank Foreign Exchange Market

Bjønnes, Geir Høidal; Osler, Carol L.; Rime, Dagfinn

doi:10.2139/ssrn.1108836

Cited by 20 publications

(32 citation statements)

References 25 publications

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“…11 Osler (2008) groups the reasons why order flow helps explain asset returns into three categories: (i) inventory effects, (ii) liquidity effects, and (iii) private information effects. In the FX market context, inventory effects arise because foreign exchange dealers, who provide liquidity to other dealers and to their customers, may experience unwanted fluctuations in their desired inventories as a result of order flow and thus incur inventory risk.…”

Section: Related Literaturementioning

confidence: 99%

“…For introductions to the market microstructure analysis of FX markets, see Lyons (2001), Sarno and Taylor (2002), Osler (2006), andOsler (2008).…”

Section: Related Literaturementioning

confidence: 99%

“…More-recent studies that consider linkages between stock markets, private information, and exchange rates are Richards (2005), Froot and Ramadorai (2005), Dunne, Hau, and Moore (2006), Francis, Hasan, and Hunter (2006), Vitale (2007), Albuquerque, de Francisco, and Marques (2008), Berger, Chaboud, Chernenko, Howorka, and Wright (2008), Bjønnes, Osler, and Rime (2008), Chai-Anant and Ho (2008), Chinn and Moore (2008), Evans and Lyons (2008), Gradojevic and Neely (2008), Love and Payne (2008), Reitz, Schmidt, and Taylor (2008), Siourounis (2008), and Tille and van Wincoop (2008). Of these, the contributions of Richards and Chai-Anant and Ho consider Asian emerging market economies, and the others consider mainly developed economies.…”

Section: Related Literaturementioning

confidence: 99%

“…Theoretical models that explain how market makers in organised exchanges should set prices in reaction to various types of news should apply, with only minor adjustments, to such markets as well. Froot and Ramadorai (2005) use an approach to categorising the relationships between FX market order flow and exchange rate movements which differs somewhat from that of Osler (2008). According to what Froot and Ramadorai label the "strong" flow-centric view, order flow may be related to exchange rate movements because it is correlated with the fundamental value of the currency and hence conveys fundamental macroeconomic and other market-wide pieces of information to market participants.…”

Section: Related Literaturementioning

confidence: 99%

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Private Information, Stock Markets, and Exchange Rates

Gyntelberg

2009

SSRN Journal

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The determination of exchange rates has long been an important but vexatious topic in international finance and economics. The recent exchange rate literature has demonstrated that exchange rates are determined importantly by investors' private information, and that macroeconomic data and other public information items play a comparatively minor role once order flow, which conveys private information to the market, is incorporated in the models. We define order flow as the difference between the volume of buyer-and seller-initiated trades in a financial market. 6In recent years, economists have become increasingly aware that not all components of order flow in foreign exchange (FX) markets are equally important; some components matter far more for price formation than others. Progress on identifying which order flow components convey the most private information has been slowed by the fact that private information is, by its nature, rarely observed directly. In this paper, we propose and provide strong empirical evidence for the view that the private information of relevance for exchange rate determination is associated far more with stock markets than with other financial markets, such as government bond markets.Our view is consistent with three main findings reported in the literature regarding the importance of various types of order flow for the exchange rate; see Osler (2008, pp 30f) for an overview. The first finding is that customer order flow carries more information than interdealer order flow. The second related finding is that financial customer order flow carries more information than commercial customer order flow. The third finding is that order flow driven by leveraged investors carries more private information than other institutional investor order flow does. Thus, our view is also consistent with empirical claims that (i) FX market order flow related to equity market transactions to a large extent tends to be initiated by leveraged financial-sector customers and (ii) FX market order flow related to bond market 1 The authors wish to thank Eli Remolona for detailed discussions and thorough critiques of earlier versions of this paper. We are grateful for comments

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Section: Related Literaturementioning

confidence: 99%

“…For introductions to the market microstructure analysis of FX markets, see Lyons (2001), Sarno and Taylor (2002), Osler (2006), andOsler (2008).…”

Section: Related Literaturementioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

See 2 more Smart Citations

Private Information, Stock Markets, and Exchange Rates

Gyntelberg

2009

SSRN Journal

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“…Using a general equilibrium framework, Evans and Lyons (2012) show that the information content in transaction activity (such as customer order flow) can predict exchange rates as well as macroeconomic fundamentals. Bjønnes et al (2008) use trader size as a proxy for the degree of private information and document information asymmetries based on the interdealer transactions of three spot traders at a large Scandinavian bank. Our findings complement and expand this literature as we are able to track individual transactions of more than 10,000 traders and assess the profitability of potentially informed traders directly.…”

Section: Introductionmentioning

confidence: 99%

Informed traders’ arrival in foreign exchange markets: Does geography matter?

et al. 2015

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This article critically investigates the possibility that private information offering systematic profit opportunities exists in the spot foreign exchange market. Using a unique dataset with trader-specific limit and market order histories for more than 10,000 traders, we detect transaction behavior consistent with the informed trading hypothesis, where traders consistently make money. We then work within the theoretical framework of a high-frequency version of a structural microstructure trade model, which directly measures the market maker's beliefs. Both the estimates of the trade model parameters and our model-free analysis of the data suggest that the timevarying pattern of the probability of informed trading is rooted in the strategic arrival of informed traders on a particular day-of-week, hour-of-day, or geographic location (market).

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The Microstructure of Currency Markets

Osler

Wang

2013

Market Microstructure in Emerging and Developed Markets

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This paper describes the structure and microeconomics of the foreign exchange market. It begins by outlining the major participants and the instruments they trade, highlighting the vast institutional changes that accompanied the emergence of electronic trading since the 1990s. It then discusses how and why order flow drives exchange rates; the economics of liquidity provision; the price discovery process; and volatility.

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Asymmetric Information in the Interbank Foreign Exchange Market

Cited by 20 publications

References 25 publications

Private Information, Stock Markets, and Exchange Rates

Private Information, Stock Markets, and Exchange Rates

Informed traders’ arrival in foreign exchange markets: Does geography matter?

The Microstructure of Currency Markets

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