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The role of asymmetric information among investors in the foreign exchange market
Author(s) -
Onur Esen
Publication year - 2008
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.367
Subject(s) - stylized fact , currency , economics , liberian dollar , foreign exchange market , monetary economics , exchange rate , foreign exchange , financial market , empirical research , financial economics , finance , macroeconomics , philosophy , epistemology
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 © 2008 John Wiley & Sons, Ltd.