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Optimal Informed Trading in the Foreign Exchange Market

Paolo Vitale

No 6553, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We formulate a market microstructure model of exchange determination we employ to investigate the impact of informed trading on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show how strategic informed agents influence exchange rates via both portfolio-balance and information effects. We outline the connection which exists between the private value of information, market efficiency, liquidity and exchange rate volatility. Our model is also consistent with recent empirical research on the microstructure of FX markets.

Keywords: Private information; Order flow; Foreign exchange micro structure; Exchange rate dynamics (search for similar items in EconPapers)
JEL-codes: D82 G14 G15 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mst
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Journal Article: Optimal informed trading in the foreign exchange market (2012) Downloads
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