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The role of asymmetric information among investors in the foreign exchange market

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  • Esen Onur

    (Department of Economics, California State University, Sacramento 6000J Street, Sacramento, CA 95819-6082, USA)

Abstract

This paper posits asymmetric information as the missing link between the currency demands of investors and changes in the exchange rate. A theoretical model demonstrates that changes in the exchange rate and currency demand are positively correlated for well-informed investors and negatively correlated for less well-informed investors, results consistent with stylized facts from the empirical literature. These theoretical findings are supported empirically using a new data set from the Israeli foreign exchange market. The empirical analysis indicates that a one million dollar larger purchase than sales by well-informed financial investors induces an increase of 0.060 per cent in the Israeli Sheqel|Dollar exchange rate over a one month period. A similar net flow from less well-informed investors results in a 0.046 per cent decrease in the exchange rate. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Esen Onur, 2008. "The role of asymmetric information among investors in the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 368-385.
    • Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:4:p:368-385
    DOI: 10.1002/ijfe.367
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    References listed on IDEAS

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    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    2. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
    3. Wu, Thomas, 2006. "Order Flow in the South: Anatomy of the Brazilian FX Market," Santa Cruz Center for International Economics, Working Paper Series qt1k2250wj, Center for International Economics, UC Santa Cruz.
    4. Bjonnes, Geir Hoidal & Rime, Dagfinn & Solheim, Haakon O.Aa., 2005. "Liquidity provision in the overnight foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 175-196, March.
    5. Jiang Wang, 1993. "A Model of Intertemporal Asset Prices Under Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(2), pages 249-282.
    6. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
    7. Carol L. Osler, 2006. "Macro lessons from microstructure," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 55-80.
    8. Martin D. D. Evans & Richard K. Lyons, 2017. "Understanding Order Flow," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 13, pages 507-546, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. John A. Carlson & Christian M. Dahl & Carol L. Osler, 2008. "Short-run Exchange-rate Dynamics: Theory And Evidence," Working Papers 39, Brandeis University, Department of Economics and International Business School.
    2. Martin Evans and Dagfinn Rime, 2010. "Micro Approaches to foreign Exchange Determination," Working Papers gueconwpa~10-10-04, Georgetown University, Department of Economics.
    3. Hossein Bastanzad & Pedram Davoudi & Hossein Tavakolian, 2018. "Foreign Exchange Rate Pricing at the Future Contract (Case of I.R. of Iran)," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(1), pages 253-293, Winter.
    4. Onur, Esen, 2011. "How much you know matters: A note on the exchange rate disconnect puzzle," MPRA Paper 32772, University Library of Munich, Germany.
    5. Wu, Thomas, 2012. "Order flow in the South: Anatomy of the Brazilian FX market," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 310-324.

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