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Is There Private Information in the FX Market? The Tokyo Experiment
Author(s) -
Ito Takatoshi,
Lyons Richard K.,
Melvin Michael T.
Publication year - 1998
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00045
Subject(s) - private information retrieval , exploit , volatility (finance) , public information , variance (accounting) , market microstructure , business , information flow , financial economics , foreign exchange , economics , foreign exchange market , monetary economics , econometrics , finance , order (exchange) , computer science , accounting , statistics , mathematics , linguistics , philosophy , computer security , internet privacy
We provide evidence of private information in the foreign exchange market. The evidence comes from the introduction of trading in Tokyo over the lunch hour. Lunch‐return variance doubles with the introduction of trading, which cannot be due to public information since the flow of public information did not change with the trading rules. We then exploit microstructure theory to discriminate between the two alternatives: private information and mispricing. Four key results support the predictions of private‐information models. Three of these involve changes in the intraday volatility U‐shape. The fourth is that opening trade causes mispricing's share in variance to fall.