Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5054429 | Economic Modelling | 2013 | 8 Pages |
Abstract
We study the risk of informed trading in an electronic foreign exchange market and test whether informed trading is driven by marketwide private information. Our framework is based on a structural microstructure trade model that measures the market makers' beliefs directly. Evidence of high concentration of informed trades is found to be inversely related to the overall 24-hour trading activity, i.e., early morning and late afternoon GMT rounds of trading involve the highest risk of informed trading. We structurally identify that the trades due to region-specific private information are dominant and explain between 5 and 25% of the variation in currency returns. In contrast, marketwide private information explains only about 1-5% of the variation in returns.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Ramazan Gençay, Nikola Gradojevic,