NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by H. Henry Cao

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Working Papers

August 2003Inventory Information
with Richard K. Lyons, Martin D.D. Evans: w9893
In a market with symmetric information about fundamentals, can information-based trade still arise? Consider bond and FX markets, where private information about nominal cash flows is generally absent, but participants are convinced that superior information exists. We analyze a class of asymmetric information - inventory information - that is unrelated to fundamentals, but still forecasts future price (by forecasting future discount factors). Empirical work based on the analysis shows that inventory information in FX does indeed forecast discount factors, and does so over both short and long horizons. The immediate price impact of shocks to inventory information is large, roughly 50 percent of that from public information shocks (the latter being the whole story under symmetric informatio...

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