Asymmetric information risk in FX markets

2020/12/19 by Angelo Ranaldo, Fabricius Somogyi
Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #Market Dynamics and Volatility #Monetary Policy and Economic Impact

paper · pdf · doi:10.1016/j.jfineco.2020.12.007

openalex publication_date 2020/12/19 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/31

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.

Citations

• A Model of Intertemporal Asset Prices Under Asymmetric Information
• A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity

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