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The role of asymmetric information among investors in the foreign exchange market

✍ Scribed by Esen Onur

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
259 KB
Volume
13
Category
Article
ISSN
1076-9307

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✦ Synopsis

Abstract

This paper posits asymmetric information as the missing link between the currency demands of investors and changes in the exchange rate. A theoretical model demonstrates that changes in the exchange rate and currency demand are positively correlated for well‐informed investors and negatively correlated for less well‐informed investors, results consistent with stylized facts from the empirical literature. These theoretical findings are supported empirically using a new data set from the Israeli foreign exchange market. The empirical analysis indicates that a one million dollar larger purchase than sales by well‐informed financial investors induces an increase of 0.060 per cent in the Israeli Sheqel/Dollar exchange rate over a one month period. A similar net flow from less well‐informed investors results in a 0.046 per cent decrease in the exchange rate. Copyright Β© 2008 John Wiley & Sons, Ltd.

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