Foreign Exchange Volume

Giovanni Cespa, Antonio Gargano, Steven J Riddiough and Lucio Sarno

The Review of Financial Studies, 2022, vol. 35, issue 5, 2386-2427

Abstract: We investigate the information contained in foreign exchange (FX) volume using a novel data set from the over-the-counter market. We find volume helps predict next-day currency returns and is economically valuable for currency investors. Predictability implies a stronger return reversal for currency pairs with abnormally low volume and is driven by the component of volume unrelated to volatility, liquidity, and order flow. We rationalize these findings via a simple model, in which FX volume helps reveal the degree of asymmetric information in currency markets. Testing this prediction shows that asymmetric information is uniform across currency pairs but varies across instruments.

JEL-codes: F31 G12 G14 G15 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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