Foreign Exchange Volume

Lucio Sarno, Giovanni Cespa, Antonio Gargano and Steven Riddiough

No 16128, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We investigate the information contained in foreign exchange (FX) volume using a novel dataset from the over-the-counter market. We find that volume helps predict next day currency returns and is economically valuable for currency investors. Predictability implies a stronger currency return reversal for currency pairs with abnormally low volume today, and is driven by the component of FX volume unrelated to volatility, illiquidity, and order flow. We rationalize these findings via a simple model of exchange rate determination, in which 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.

Keywords: Foreign exchange volume; Currency returns; Asymmetric information (search for similar items in EconPapers)
JEL-codes: F31 G12 G14 G15 (search for similar items in EconPapers)
Date: 2021-05
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