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Asymmetric Information Risk in FX Markets

Angelo Ranaldo () and Fabricius Somogyi

No 1820, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: This work studies the information content of trades in the world’s largest over-thecounter (OTC) market, the foreign exchange (FX) market. It analyses a novel, comprehensive order flow dataset, distinguishing amongst different groups of market participants and covering a large cross-section of currency pairs. We find compelling evidence of heterogeneous superior information across agents, time and currency pairs, consistent with the asymmetric information theory and OTC market fragmentation. A trading strategy based on the permanent price impact, capturing asymmetric information risk, generates high returns even after accounting for risk, transaction cost and other common risk factors documented in the FX literature.

Keywords: Asymmetric information; Currency portfolios; Heterogeneity; Order flow; OTC; Risk premium (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Pages: 137 pages
Date: 2018-09, Revised 2020-04
New Economics Papers: this item is included in nep-mst
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Journal Article: Asymmetric information risk in FX markets (2021) Downloads
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