Local information in foreign exchange markets

This study shows that order flow in a foreign exchange market appears to have permanent price impact only if it comes from certain regions. These regions are – as predicted by the local information hypothesis – centers of political and financial decision making. It is revealing that orders from other regions only show a very short-lived but no permanent price impact. Local information is so important that it carries over from the usually considered market orders to aggressively priced limit orders too. The finding is robust to common news shocks, to the consideration of feedback trading and to further controls.