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Informed traders’ arrival in foreign exchange markets: Does geography matter?

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  • Ramazan Gençay
  • Nikola Gradojevic
  • Richard Olsen
  • Faruk Selçuk

Abstract

This article critically investigates the possibility that private information offering systematic profit opportunities exists in the spot foreign exchange market. Using a unique dataset with trader-specific limit and market order histories for more than 10,000 traders, we detect transaction behavior consistent with the informed trading hypothesis, where traders consistently make money. We then work within the theoretical framework of a high-frequency version of a structural microstructure trade model, which directly measures the market maker’s beliefs. Both the estimates of the trade model parameters and our model-free analysis of the data suggest that the time-varying pattern of the probability of informed trading is rooted in the strategic arrival of informed traders on a particular day-of-week, hour-of-day, or geographic location (market). Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Ramazan Gençay & Nikola Gradojevic & Richard Olsen & Faruk Selçuk, 2015. "Informed traders’ arrival in foreign exchange markets: Does geography matter?," Empirical Economics, Springer, vol. 49(4), pages 1431-1462, December.
    • Handle: RePEc:spr:empeco:v:49:y:2015:i:4:p:1431-1462
    DOI: 10.1007/s00181-015-0917-z
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    Cited by:

    1. Meifen Qian & Bin Yu & Qianyu Zhu, 2018. "Noise traders, firm-specific uncertainty and technical trading effectiveness," Applied Economics Letters, Taylor & Francis Journals, vol. 25(13), pages 918-923, July.
    2. Gradojevic, Nikola & Erdemlioglu, Deniz & Gençay, Ramazan, 2017. "Informativeness of trade size in foreign exchange markets," Economics Letters, Elsevier, vol. 150(C), pages 27-33.
    3. Gençay, Ramazan & Gradojevic, Nikola, 2013. "Private information and its origins in an electronic foreign exchange market," Economic Modelling, Elsevier, vol. 33(C), pages 86-93.
    4. Sandra Ferreruela & Daniel Martín, 2022. "Market Quality and Short-Selling Ban during the COVID-19 Pandemic: A High-Frequency Data Approach," JRFM, MDPI, vol. 15(7), pages 1-29, July.
    5. K. Bień-Barkowska, 2013. "Informed and uninformed trading in the EUR/PLN spot market," Applied Financial Economics, Taylor & Francis Journals, vol. 23(7), pages 619-628, April.

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