Foreign Exchange Volume: Sound and Fury Signifying Nothing?

Richard K. Lyons

98 citations0/0 files storedNational Bureau of Economic Research

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Financial Markets and Investment Strategies Monetary Policy and Economic Impact Financial Risk and Volatility Modeling

Abstract

This paper examines whether currency trading volume is informative, and under what circumstances. Specifically, we use transactions data to test whether trades occurring when trading intensity is high are more informative - dollar for dollar - than trades occurring when intensity is low. Theory admits both possibilities, depending primarily on the posited information structure. We present what we call a hot-potato model of currency trading, which explains why low-intensity trades might be more informative. In the model, the wave of inventory-management trading among dealers following innovations in order flow generates an inverse relationship between intensity and information content. Empirically, low-intensity trades are more informative, supporting the hot-potato hypothesis."

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References

1968The Cost of Transacting 1964Public Regulation of the Securities Markets 1995Tests of microstructural hypotheses in the foreign exchange market 1991A Bayesian model of intraday specialist pricing

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2006Intraday seasonality in activities of the foreign exchange markets: Evidence from the electronic broking system 1999Trading volumes and transaction costs in the foreign exchange market 2002The Market Microstructure of Central Bank Intervention 2004Inter‐Dealer Trading in Financial Markets 1999Macroeconomic Implications of the Beliefs and Behavior of Foreign Exchange Traders 2013Positive Feedback Trading Under Stress: Evidence from the US Treasury Securities Market 1996Microstructural dynamics in a foreign exchange electronic broking system 1999The Market Microstructure of Central Bank Intervention

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