Information flows in foreign exchange markets: dissecting customer currency trades

BIS Working Papers No 405
March 2013

Published in Journal of Finance, vol 71, 2016, pp 601-34.

We study the information in order flows in the world's largest over-the-counter market, the foreign exchange market. The analysis draws on a data set covering a broad cross-section of currencies and different customer segments of foreign exchange end-users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.

JEL classification: F31, G12, G15

Keywords: Order flow, foreign exchange risk premia, heterogeneous information, carry trades


A previous version of the paper circulated under the title "Information flows in dark markets: dissecting customer currency trades".