Is There Private Information in the FX Market? The Tokyo Experiment

Authors

  • Takatoshi Ito,

    1. Hitotsubashi University and NBER
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    • Respective affiliations are Hitotsubashi University and NBER; UC-Berkeley and NBER; and Arizona State University. We thank the following for valuable comments: an anonymous referee, Kathryn Dominguez, Martin Evans, Silverio Foresi, Jeff Frankel, Paul Pfleiderer, Andy Rose, Matt Spiegel, René Stulz, Avanidhar Subrahmanyam, Ingrid Werner, and seminar participants at Santa Cruz, LSE, Berkeley, FRBNY, Rutgers, Stanford, the IMF, Arizona, UCSD, Stockholm, ECARE, Geneva, Toulouse, Limburg, the NBER, and the 1997 AEA Meetings. Lyons thanks the National Science Foundation and the Berkeley Program in Finance for financial assistance, and the San Francisco Federal Reserve Bank for hospitality as a visiting scholar.
  • Richard K. Lyons,

    1. NBER and UC-Berkeley
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    • Respective affiliations are Hitotsubashi University and NBER; UC-Berkeley and NBER; and Arizona State University. We thank the following for valuable comments: an anonymous referee, Kathryn Dominguez, Martin Evans, Silverio Foresi, Jeff Frankel, Paul Pfleiderer, Andy Rose, Matt Spiegel, René Stulz, Avanidhar Subrahmanyam, Ingrid Werner, and seminar participants at Santa Cruz, LSE, Berkeley, FRBNY, Rutgers, Stanford, the IMF, Arizona, UCSD, Stockholm, ECARE, Geneva, Toulouse, Limburg, the NBER, and the 1997 AEA Meetings. Lyons thanks the National Science Foundation and the Berkeley Program in Finance for financial assistance, and the San Francisco Federal Reserve Bank for hospitality as a visiting scholar.
  • Michael T. Melvin

    1. Arizona State University
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    • Respective affiliations are Hitotsubashi University and NBER; UC-Berkeley and NBER; and Arizona State University. We thank the following for valuable comments: an anonymous referee, Kathryn Dominguez, Martin Evans, Silverio Foresi, Jeff Frankel, Paul Pfleiderer, Andy Rose, Matt Spiegel, René Stulz, Avanidhar Subrahmanyam, Ingrid Werner, and seminar participants at Santa Cruz, LSE, Berkeley, FRBNY, Rutgers, Stanford, the IMF, Arizona, UCSD, Stockholm, ECARE, Geneva, Toulouse, Limburg, the NBER, and the 1997 AEA Meetings. Lyons thanks the National Science Foundation and the Berkeley Program in Finance for financial assistance, and the San Francisco Federal Reserve Bank for hospitality as a visiting scholar.

ABSTRACT

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.

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