Private information, bid-ask spreads and return volatility in the foreign exchange market
Private information, bid-ask spreads and return volatility 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 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.
high frequency data, foreign exchange, market microstructure, asymmetric information, order-driven
McGroarty, F.
693a5396-8e01-4d68-8973-d74184c03072
18 October 2007
McGroarty, F.
693a5396-8e01-4d68-8973-d74184c03072
McGroarty, F.
(2007)
Private information, bid-ask spreads and return volatility in the foreign exchange market.
2007 Annual Meeting of the Financial Management Association International, Orlando, United States.
17 Oct 2007.
Record type:
Conference or Workshop Item
(Paper)
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 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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Published date: 18 October 2007
Venue - Dates:
2007 Annual Meeting of the Financial Management Association International, Orlando, United States, 2007-10-17 - 2007-10-17
Keywords:
high frequency data, foreign exchange, market microstructure, asymmetric information, order-driven
Identifiers
Local EPrints ID: 58315
URI: http://eprints.soton.ac.uk/id/eprint/58315
PURE UUID: 243d2f71-0a14-41a9-803b-afab0084cdc7
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Date deposited: 18 Aug 2008
Last modified: 12 Dec 2021 03:23
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Contributors
Author:
F. McGroarty
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