Marketwide Private Information in Stocks: Forecasting Currency Returns

Rui Albuquerque (), Eva de Francisco () and Luis Marques ()

No 5604, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: currency returns; equity returns; firm-specific private information; marketwide private information; order flow; principal components (search for similar items in EconPapers)
JEL-codes: F31 G11 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-fin, nep-fmk and nep-for
Date: 2006-03
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Journal Article: Marketwide Private Information in Stocks: Forecasting Currency Returns (2008)
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