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Is there private information in the FX market? The Tokyo experiment

Takatoshi Ito; Richard K. Lyons; Michael T. Mann

Title:
Is there private information in the FX market? The Tokyo experiment
Author(s):
Ito, Takatoshi
Lyons, Richard K.
Mann, Michael T.
Date:
Type:
Working papers
Department:
Center on Japanese Economy and Business
Permanent URL:
Series:
Center on Japanese Economy and Business Working Papers
Part Number:
128
Abstract:
It is a common view that private information in the foreign exchange market does not exist. We provide evidence against this view. The evidence comes from the introduction of trading in Tokyo over the lunch-hour. Lunch return variance doubles with the introduction of trading, which cannot be due to public information since the flow of public information did not change with the trading rules. Having eliminated public information as the cause, we exploit the volatility pattern over the whole day to discriminate between the two alternatives: private information and pricing errors. Three key results support the predictions of private-information models. First, the volatility U-shape flattens: greater revelation over lunch leaves a smaller share for the morning and afternoon. Second, the U-shape tilts upward, an implication of information whose private value is transitory. Finally, the morning exhibits a clear U-shape when Tokyo closes over lunch, and it disappears when trading is introduced.
Subject(s):
Economics, Commerce-Business
Item views:
185
Metadata:
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