Abstract
Contemporaneous and positive correlation between order flow and exchange rate is a stylized fact. I postulate that the order flow driven by informed trading has a significant price impact. I also do that little price reversal occurs in the subsequent period. The Markov-switching model provides probabilities of a significant price impact and little price reversal. I apply these probabilities to measure the probability of informed trading. The measure explains a greater share of the random walk component of price compared to other measures offered by previous studies.
Original language | English |
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Pages (from-to) | 77-90 |
Number of pages | 14 |
Journal | Journal of International Financial Markets, Institutions and Money |
Volume | 42 |
DOIs | |
Publication status | Published - 2016 May 1 |
Keywords
- Exchange rates
- High-frequency data
- Informed trading
- Markov-switching model
ASJC Scopus subject areas
- Finance
- Economics and Econometrics