Abstract
• We study the extent of private information revealed through trades in the foreign exchange market. • We find the intraday variation in the proportion of permanent price variations driven by trade-related information has a repetitive periodic pattern, • We show the information share of private information in trades evolves across trading periods in the FX markets. • We find that, among market participants, heterogeneous interpretation of announcements and opinion disagreement after the announcement are revealed from order flow, and the efficient price is still driven by information implicit in trading activities after the announcement. We study the extent to which private information is revealed through trades in the foreign exchange market. The trade informativeness measured from the VAR framework of trades and quotes allows us to quantify the impact of asymmetric information on return variation. We find the intraday variation in the proportion of permanent price variation driven by trade-related information has a repetitive periodic pattern, and trades in the overlapping trading hours of London and New York carry most information than the other time segments. The results show the fraction of trade-related component to exchange rate variation positively relates to trading volume and reversely relates to effective spread. With a comprehensive set of 48 real-time US, European, and Japanese macroeconomic news surprises variables, and controlling for the effect of trading volume, spread, and volatility, we find news of production-related economic indicator, e.g., GDP and industrial production, has a positive relationship with the trade informativeness in a trading period, suggesting the increased private information share may be attributed to heterogeneous interpretations of the announcement among market participants. Announcement-related information is gradually resolved into the price, and the information is transited via the channel of trading activities.
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