Asymmetric Information Risk in FX Markets

Item Type Journal paper
Abstract This work studies the information content of trades in the world’s largest over-the-counter (OTC) market, the foreign exchange (FX) market. It analyzes a novel, comprehensive order flow data set, distinguishing among 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 shown in the FX literature.
Authors Ranaldo, Angelo & Somogyi, Fabricius
Journal or Publication Title Journal of Financial Economics
Language English
Keywords Asymmetric information, Currency portfolios, Order flow, OTC, Risk premium
Subjects finance
HSG Classification contribution to scientific community
HSG Profile Area SOF - System-wide Risk in the Financial System
Refereed Yes
Date May 2021
Publisher Elsevier
Volume 140
Number 2
Page Range 391-411
ISSN 0304-405X
Publisher DOI
Official URL
Depositing User Christina Ihasz
Date Deposited 07 May 2020 07:33
Last Modified 27 Mar 2023 00:25


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Ranaldo, Angelo & Somogyi, Fabricius (2021) Asymmetric Information Risk in FX Markets. Journal of Financial Economics, 140 (2). 391-411. ISSN 0304-405X

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