Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market
Centre for Risk Research Working Papers, School of Management Paper No. CRR-05-01
39 Pages Posted: 2 Jun 2005
Date Written: March 2005
Abstract
Financial markets generally, and the spot foreign exchange market in particular, are reputed to be excessively volatile. Previous research has linked this excess volatility to private information. This article re-examines the theory and challenges that link. Empirical evidence suggests that random variation between buy and sell volumes is a more important driver than private informaion in the spot foreign exchange market. The paper also develops theoretical propositions for the relationships between key market variables on an intraday basis. High frequency data is used to examine the role of private information in explaining well documented intraday patterns that persist in the time series of a number of trade related variables, including return volatility.
Keywords: High frequency data, Foreign exchange, Market microstructure, Asymmetric information, Order-driven
JEL Classification: F31, G12, G15, D4
Suggested Citation: Suggested Citation