Working Paper – Information Flows in Dark Markets: Dissecting Customer Currency Trades

by Sabrina I. Pacifici on March 8, 2013

Information Flows in Dark Markets: Dissecting Customer Currency Trades, by Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf. Working Papers No 405, March 2013. Bank for International Settlements

  • “We study the information in order flows of different customer segments in the world’s largest over-the-counter market, the foreign exchange market. The analysis draws on a unique dataset covering a broad cross-section of currency pairs and distinguishing trades by key types of foreign exchange end-users. We find that order flows are highly informative about future exchange rates and provide significant economic value for the few large dealers who have access to these flows. Moreover, customer groups systematically engage in risk sharing with each other and differ markedly in their predictive ability, trading styles, and risk exposure.”
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