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Journal of Finance Vol. 71 No. 2 2016

Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades

Lukas Menkhoff1,2,3; Lucio Sarno1,2,3; Maik Schmeling1,2,3; Andreas Schrimpf2

1 German Institute for Economic Research · 2 City, University of London · 3 Centre for Economic Policy Research

open access

Abstract

We study the information in order flows in the world's largest over‐the‐counter market, the foreign exchange (FX) market. The analysis draws on a data set covering a broad cross‐section of currencies and different customer segments of FX end‐users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.

DOI
10.1111/jofi.12378
Volume
71
Issue
2
Pages
601-634
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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