Private information, bid-ask spreads and return volatility in the foreign exchange market
At 2007 Annual Meeting of the Financial Management Association International, United States.
18 Oct 2007.
Full text not available from this repository.
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 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.
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