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Asymmetric Information Risk in FX Markets

Author

Listed:
  • Angelo Ranaldo
  • Fabricius Somogyi

Abstract

This work studies the information content of trades in the world’s largest over-thecounter (OTC) market, the foreign exchange (FX) market. It analyses a novel, comprehensive order flow dataset, distinguishing amongst 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 documented in the FX literature.

Suggested Citation

  • Angelo Ranaldo & Fabricius Somogyi, 2018. "Asymmetric Information Risk in FX Markets," Working Papers on Finance 1820, University of St. Gallen, School of Finance, revised Apr 2020.
    • Handle: RePEc:usg:sfwpfi:2018:20
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    Keywords

    Asymmetric information; Currency portfolios; Heterogeneity; Order flow; OTC; Risk premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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