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The Informational Content of Trades on Foreign Exchange Futures: an Application to the Brazilian Market

Author

Listed:
  • Vanessa Neumann Sulzbach

    (Fundação de Economia e Estatística e Escola de Economia de São Paulo-FGV)

  • João Mergulhão

    (Escola de Economia de São Paulo - FGV e CEQEF-FGV)

  • Pedro L. Valls Pereira

Abstract

The microstructure approach to exchange rates have received special attention in recent years, particularly because it highlights the existence of asymmetric information in this market. The Brazilian future FX market data provided from BM&F was used to test the private information effects of trading on prices. The structural VAR results confirm the existence of asymmetric information in this market, indicating that roughly 50% of all efficient price variation is due to the private information of the order flow. Additionally, the order flow observation allows the informed and uninformed arrival rates estimation, which we use to calculate the probability of information-based trade (PIN). High PIN value leads to wide spreads, which reduces the market liquidity. The PIN results about 1.53% indicate the liquidity of Brazilian future FX market is quite high, what impound fewer trading costs for the uninformed agents.

Suggested Citation

  • Vanessa Neumann Sulzbach & João Mergulhão & Pedro L. Valls Pereira, 2016. "The Informational Content of Trades on Foreign Exchange Futures: an Application to the Brazilian Market," Brazilian Review of Finance, Brazilian Society of Finance, vol. 14(1), pages 7-43.
    • Handle: RePEc:brf:journl:v:14:y:2016:i:1:p:7-43
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    More about this item

    Keywords

    FX Microstructure approach; Order Flow; Probability of Informationbased Trade (PIN); Brazilian future FX Market;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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