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The role of private information in return volatility, bid–ask spreads and price levels in the foreign exchange market

The role of private information in return volatility, bid–ask spreads and price levels in the foreign exchange market
The role of private information in return volatility, bid–ask spreads and price levels in the foreign exchange market
Trading volume and order flow have both been closely associated with informed trader activity in the market microstructure literature. Using theory that explains regular intraday patterns in trading data, we transform these two variables into proxies for private information and examine their relationships with bid–ask spreads and return volatility. We use a unique and unusually rich high-frequency intraday dataset from the world's largest financial market, namely, the electronic inter-dealer spot foreign exchange market. Our analysis takes account of institutional features peculiar to this order-driven market. Our empirical results strongly affirm our theoretical understanding of how these markets work. They also reveal how the structure of the inter-dealer spot FX market affects exchange rate volatility. Finally, we also explore how private information contributes to the evolution of prices.
1042-4431
387-401
McGroarty, F.
693a5396-8e01-4d68-8973-d74184c03072
Thomas, S.
0f83004b-179e-4b71-8374-25345d0e9dad
ap Gwilym, O.
dcad2393-1a8b-4088-8508-cdf45e40816d
McGroarty, F.
693a5396-8e01-4d68-8973-d74184c03072
Thomas, S.
0f83004b-179e-4b71-8374-25345d0e9dad
ap Gwilym, O.
dcad2393-1a8b-4088-8508-cdf45e40816d

McGroarty, F., Thomas, S. and ap Gwilym, O. (2009) The role of private information in return volatility, bid–ask spreads and price levels in the foreign exchange market. Journal of International Financial Markets, Institutions and Money, 19 (2), 387-401. (doi:10.1016/j.intfin.2008.04.001).

Record type: Article

Abstract

Trading volume and order flow have both been closely associated with informed trader activity in the market microstructure literature. Using theory that explains regular intraday patterns in trading data, we transform these two variables into proxies for private information and examine their relationships with bid–ask spreads and return volatility. We use a unique and unusually rich high-frequency intraday dataset from the world's largest financial market, namely, the electronic inter-dealer spot foreign exchange market. Our analysis takes account of institutional features peculiar to this order-driven market. Our empirical results strongly affirm our theoretical understanding of how these markets work. They also reveal how the structure of the inter-dealer spot FX market affects exchange rate volatility. Finally, we also explore how private information contributes to the evolution of prices.

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Published date: April 2009
Organisations: Management

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Local EPrints ID: 150731
URI: http://eprints.soton.ac.uk/id/eprint/150731
ISSN: 1042-4431
PURE UUID: 3e7f1279-c538-4cec-bbff-508cf686888e
ORCID for F. McGroarty: ORCID iD orcid.org/0000-0003-2962-0927

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Date deposited: 10 May 2010 10:56
Last modified: 14 Mar 2024 02:48

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Contributors

Author: F. McGroarty ORCID iD
Author: S. Thomas
Author: O. ap Gwilym

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