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Contribution Details
| Type | Conference Presentation |
| Scope | Contributions to practice |
| Title | When do informed traders arrive in FX markets? |
| Organization Unit | |
| Authors |
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| Presentation Type | speech |
| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Event Title | 2008 Latin American Meeting of the Econometric Society |
| Event Type | conference |
| Event Location | Rio de Janeiro |
| Event Start Date | November 2 - 2008 |
| Event End Date | November 22 - 2008 |
| Abstract Text | This article examines the implications of the existence of private information in the spot foreign exchange market. Our framework is a high-frequency version of a structural microstructure trade model that measures the market maker’s beliefs directly. We find that the underpinnings for the time-varying pattern of the probability of informed trading are rooted in the strategic arrival of informed traders on a particular hour-of-day, day-of-week, and geographic location (market). Specifically, we document that informed traders not only pick the low activity hours, but also attach the largest market weight to a particular market. The distributions of the estimated arrival rates confirm the commitment of the informed traders to strategic trading activities. In our framework, we acknowledge that an expected loss of informed trading to the market maker is a function of both the probability of informed trading and its likely impact on the price. The impact of the uninformed traders’ arrival on the daily foreign exchange price volatility is about twice the magnitude of the one for informed traders. These effects are in stark contrast to the findings from the hourly data that indicate dominance of informed traders. Finally, the results relate the informational content of trading to the trade size and suggest that the probability of the informed large trading is significantly higher than the probability of uninformed large trading. |
| Other Identification Number | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1071343 |
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