The relationship between trading volume and volatility in foreign exchange markets continues to be of much interest, especially given the higher than expected volatility of returns. Allowing for nonlinearities, this paper tests competing hypotheses on the possible relationship between volatility and trading volume using data for three major currency futures contracts denominated in US dollars, namely the British pound, the Canadian dollar and the Japanese yen. We find that trading volumes and return volatility are negatively correlated, implying a lack of support for the mixture of distributions hypothesis (MDH). Using linear and nonlinear Granger causality tests, we document significant lead–lag relations between trading volumes and return volatility consistent with the sequential arrival of information (SAI) hypothesis. These findings are robust and not sample-dependent or due to heterogeneity of beliefs as proxied by open interest. Furthermore, our results are insensitive to the modeling approach used to recover volatility measures. Overall, our findings support the contention that short- to medium-term currency relationships may be dominated by trading dynamics and not by fundamentals.

Estimates of ex-ante equity premia are important in planning investments in pension funds, life insurance pools, and for other long-term financial obligations or goals. However, while global cross-border investment positions and flows have been rising, there is little research on non-US ex-ante equity premia or on their determinants in a global setting. This paper uses data on a recent 8-year period from 33 countries and models simultaneously our estimate of the ex-ante equity premium as a dependent variable and our measure of financial architecture as an instrumental variable. We document that ex-ante equity premia are larger in countries that have a more bank-oriented financial architecture, are wealthier, and have better governance. These results are robust to alternative model specifications and estimation techniques. Given the importance of equity premia and financial architecture, these results should be of much interest to scholars, managers, regulators, and policy makers.