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Speculator activity and the cross-asset predictability of FX returns

Anton Hasselgren, Jarkko Peltomäki and Michael Graham

International Review of Financial Analysis, 2020, vol. 72, issue C

Abstract: This paper tests the gradual information diffusion hypothesis, which suggests that information spreads gradually across asset markets, to explain the role of speculator activity in the cross-asset return predictability of foreign exchange (FX) market strategies. We argue that the activity of speculators increase the rate of information diffusion across asset markets. Hence, we expect the predictive effect from the equity and commodity markets on FX market strategies to be weaker when speculators are active in the FX market. Our results show that, when speculator activity is high, the equity market's ability to predict the FX market dissipates, but not to the same extent as for the commodity market. Our findings suggest that speculators play a vital role in enhancing informational efficiency in the FX market.

Keywords: Speculation; Trading strategies; Predictability; Information; Foreign exchange (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:72:y:2020:i:c:s1057521920302052

DOI: 10.1016/j.irfa.2020.101561

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