Lucio Sarno (Cass Business School)

“Foreign Exchange Volume”

Abstract: We provide the first comprehensive study of foreign exchange (FX) volume using a novel dataset offering the broadest coverage of volume at high frequency. FX volume is related to volatility, liquidity, information arrival, and return spreads across equity and bond markets. However we find it is the unexpected component of volume that can predict short-term currency returns: when a currency pair’s daily volume is unexpectedly low, it exhibits a strong return reversal over the following day. This predictability is economically valuable for currency investors and is consistent with an asymmetric information hypothesis, in which privately informed trading increases with volume.