Is There Private Information in the FX Market?: The Tokyo Experiment, Issue 5936
National Bureau of Economic Research, 1997 - Foreign exchange - 27 pages
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
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1995 to January 24 to December afternoon variance analysis bid-offer midpoint Bollerslev closure Dani Rodrik dates day after sample day before sample dealers December 21 Economics error component Fama flatten flow of public Foreign Exchange Market French and Roll FX market Hong Kong hypothesis information is revealed information whose private intraday volatility January 31 lunch opening lunch variance lunch volatility lunch-hour trade lunch-to-afternoon variance ratio Martin Feldstein Melvin morning and afternoon morning U-shape NBER Working Papers November 24 opened relative opening of lunch-hour P-values Papers and Reprints partial subscriptions predict price effects pricing errors private value private-information models public information regime Reprints with searchable return variance revealed by trades Richard K risk premium Robert E sample i.e. Singapore Stock Market superior knowledge Takatoshi Ito temporary private information Tokyo Experiment trading days trading hours volatility U-shape weekdays from January weekdays from November World Wide Web yen/dollar rate