The Big Players in the Foreign Exchange Market: Do They Trade on Information or Noise? / Shang-Jin Wei, Jungshik Kim.

Format:

Book

Author/Creator:

Wei, Shang-Jin.

Contributor:

National Bureau of Economic Research.

Kim, Jungshik.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6256.

NBER working paper series no. w6256

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Big Players in the Foreign Exchange Market

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

This paper studies whether there exists private information in the foreign exchange market, and whether speculation reduces or exacerbates volatility. It makes use of a recent data set on foreign currency positions by large market participants that include positions on options and other derivatives. This is the first data set that describes comprehensive currency positions of market participants. There are two main findings. First, not only the absolute value of the options position but also that of spot, forward and futures positions by large participants Granger-causes exchange rate volatility. This suggests that the large participants' currency speculation does not stabilize exchange rate volatility. Second, regression analyses do not find any positive association between large participants' position in a foreign currency with its subsequent appreciation. A non-parametric approach finds some weak support for a positive association but not on a systematic level. This casts doubt on the view that large participants have better information about the future movement of exchange rates. It further strengthens the case that the large players trade on noise rather than on information.

Notes:

Print version record

November 1997.