Faculty of Economics and Business Administration Publications Database

Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades

Menkhoff, Lukas
Sarno, Lucio
Schrimpf, Andreas
Volume: 71
Number: 2
Pages: 601 - 634
Month: April
ISSN-Print: 0022-1082
Link External Source: Online Version
Year: 2016

We study the information in order flows in the world's largest over‐the‐counter market, the foreign exchange (FX) market. The analysis draws on a data set covering a broad cross‐section of currencies and different customer segments of FX end‐users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.