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The role of asymmetric information among investors in the foreign exchange market

Esen Onur ()

International Journal of Finance & Economics, 2008, vol. 13, issue 4, 368-385

Abstract: This paper posits asymmetric information as the missing link between the currency demands of investors and changes in the exchange rate. A theoretical model demonstrates that changes in the exchange rate and currency demand are positively correlated for well-informed investors and negatively correlated for less well-informed investors, results consistent with stylized facts from the empirical literature. These theoretical findings are supported empirically using a new data set from the Israeli foreign exchange market. The empirical analysis indicates that a one million dollar larger purchase than sales by well-informed financial investors induces an increase of 0.060 per cent in the Israeli Sheqel|Dollar exchange rate over a one month period. A similar net flow from less well-informed investors results in a 0.046 per cent decrease in the exchange rate. Copyright © 2008 John Wiley & Sons, Ltd.

Date: 2008
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DOI: 10.1002/ijfe.367

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International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

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Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:4:p:368-385