Article

Information and volatility links in the foreign exchange market

Accounting and Finance 01/2009; 49(2):385-405. pp.385-405
Source: RePEc

ABSTRACT We apply the trading model of Fleming "et al" (1998). to a number of currency markets. The model posits that two markets can have common volatility structures as a result of receiving common information and from cross-hedging activity where a position in one currency is used to hedge risk in a position taken in another. Our results imply that the model is effective in identifying common information flows and volatility spillovers in the currency markets and that some of these effects are lost when simply examining raw correlations. A series of specification tests of the 21 bivariate systems that are examined provides support for the trading model in the foreign exchange context. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

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Keywords

21 bivariate systems
 
al
 
common information
 
common information flows
 
cross-hedging activity
 
currency markets
 
foreign exchange context
 
Journal compilation
 
model posits
 
specification tests
 
trading model
 
two markets