NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Foreign Exchange Volume: Sound and Fury Signifying Nothing?

Richard K. Lyons

NBER Working Paper No. 4984
Issued in January 1995
NBER Program(s):   IFM

This paper examines whether currency trading volume is informative, and under what circumstances. Specifically, we use transactions data to test whether trades occurring when trading intensity is high are more informative - dollar for dollar - than trades occurring when intensity is low. Theory admits both possibilities, depending primarily on the posited information structure. We present what we call a hot-potato model of currency trading, which explains why low-intensity trades might be more informative. In the model, the wave of inventory-management trading among dealers following innovations in order flow generates an inverse relationship between intensity and information content. Empirically, low-intensity trades are more informative, supporting the hot-potato hypothesis."

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Document Object Identifier (DOI): 10.3386/w4984

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