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Measuring the information content of customer foreign exchange orders

Rosov, S; Foster, FD; (2014) Measuring the information content of customer foreign exchange orders. Australian Journal of Management , 39 (2) 247 - 264. 10.1177/0312896213478435. Green open access

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Abstract

This paper investigates whether customer order flow conveys information about future foreign exchange (FX) prices. We use a unique data set from a leading Australian commercial bank that records every FX trade made by the bank in the spot Australian dollar/US dollar market between 2005 and 2010. We find little evidence in support of a cointegrating relation or a statistically significant correlation between customer order flow and FX returns. However, consistent with the liquidity provision role of non-financial customers in Evans and Lyons ((2002) Order flow and exchange rate dynamics. Journal of Political Economy 110: 170–180), we find a statistically significant negative correlation between order flow from the diversified economic sector and FX returns. A dynamic analysis suggests that order flow has little or no price impact on FX returns. These results suggest that the non-financial customer order flow of a commercial bank does not carry information about FX prices.

Type: Article
Title: Measuring the information content of customer foreign exchange orders
Open access status: An open access version is available from UCL Discovery
DOI: 10.1177/0312896213478435
Publisher version: http://dx.doi.org/10.1177/0312896213478435
Language: English
Additional information: This article is distributed under the terms of the Creative Commons Attribution-NonCommercial 3.0 License (http://www.creativecommons.org/licenses/by-nc/3.0/) which permits non-commercial use, reproduction and distribution of the work without further permission provided the original work is attributed as specified on the SAGE and Open Access page (http://www.uk.sagepub.com/aboutus/openaccess.htm).
UCL classification: UCL
URI: https://discovery.ucl.ac.uk/id/eprint/1469515
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