Asymmetric information risk in FX markets

Angelo Ranaldo and Fabricius Somogyi

Journal of Financial Economics, 2021, vol. 140, issue 2, 391-411

Abstract: This work studies the information content of trades in the world’s largest over-the-counter (OTC) market, the foreign exchange (FX) market. It analyzes a novel, comprehensive order flow data set, distinguishing among different groups of market participants and covering a large cross-section of currency pairs. We find compelling evidence of heterogeneous superior information across agents, time, and currency pairs, consistent with the asymmetric information theory and OTC market fragmentation. A trading strategy based on the permanent price impact, capturing asymmetric information risk, generates high returns even after accounting for risk, transaction cost, and other common risk factors shown in the FX literature.

Keywords: Asymmetric information; Currency portfolios; Order flow; OTC; Risk premium (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Working Paper: Asymmetric Information Risk in FX Markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:140:y:2021:i:2:p:391-411

DOI: 10.1016/j.jfineco.2020.12.007

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