Marketwide Private Information in Stocks: Forecasting Currency Returns

Albuquerque, Rui; Francisco, Eva de; Brandão-Marques, Luis

doi:10.2139/ssrn.887522

Cited by 26 publications

(28 citation statements)

References 55 publications

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“…But, the view that microstructure frictions in exchange rate markets can only explain high-frequency exchange rate movements is easy to reject. Albuquerque, Eva De Francisco, and Luis B. Marques (2008) provide empirical evidence that private information has significant effects on various asset returns, including exchange rates, at least at a monthly frequency. David W. Berger et al (2008) provide evidence that microstructure frictions in exchange rate markets are relevant at horizons as long as three months.…”

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confidence: 99%

Understanding the Forward Premium Puzzle: A Microstructure Approach

Burnside

Eichenbaum

Rebelo

2009

American Economic Journal: Macroeconomics

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Aclassic challenge confronting macroeconomists is how to explain why low interest rate currencies tend to depreciate relative to high interest rate currencies. An alternative statement of the challenge is that currencies, which are at a forward premium, tend to depreciate. This empirical regularity, known as the "forward premium puzzle," represents an egregious deviation from uncovered interest parity (UIP). While great strides have been made in documenting the puzzle, very little progress has been made in explaining it.1 Much of the literature on this puzzle shares two key features. First, the foreign exchange market is modeled as an idealized Walrasian market.2 Second, the literature emphasizes risk-based explanations for the forward premium. The first feature is problematic because the foreign exchange market is actually a decentralized, over-the-counter market in which market makers play a central role (see Richard K. Lyons 2001; Lucio Sarno and Mark P. Taylor 2001). The second feature is also problematic. While risk must surely play a role in exchange rate markets, it has been extremely difficult to tie deviations from uncovered interest parity to economically meaningful measures of risk.

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confidence: 99%

Understanding the Forward Premium Puzzle: A Microstructure Approach

Burnside

Eichenbaum

Rebelo

2009

American Economic Journal: Macroeconomics

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“…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%

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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“…Albuquerque et al (2008) structurally identify marketwide private information from firmspecific information in an equity market and prove its relevance for both equity and FX markets. Osler and Vandrovych (2009) show that the trades by leveraged investors are consistently informative for the price.…”

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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Marketwide Private Information in Stocks: Forecasting Currency Returns

Cited by 26 publications

References 55 publications

Understanding the Forward Premium Puzzle: A Microstructure Approach

Understanding the Forward Premium Puzzle: A Microstructure Approach

Private Information, Stock Markets, and Exchange Rates

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

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