Asymmetric Information Risk in FX Markets
Journal
Journal of Financial Economics
ISSN
0304-405X
Type
journal article
Date Issued
2021-05
Author(s)
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.
Language
English
Keywords
Asymmetric information
Currency portfolios
Order flow
OTC
Risk premium
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Refereed
Yes
Publisher
Elsevier
Volume
140
Number
2
Start page
391
End page
411
Subject(s)
Eprints ID
260198