The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades
Published: 03/18/2016 | DOI: 10.1111/jofi.12378
LUKAS MENKHOFF, LUCIO SARNO, MAIK SCHMELING, ANDREAS SCHRIMPF
We study the information in order flows in the world's largest over‐the‐counter market, the foreign exchange (FX) market. The analysis draws on a data set covering a broad cross‐section of currencies and different customer segments of FX end‐users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.
Carry Trades and Global Foreign Exchange Volatility
Published: 03/27/2012 | DOI: 10.1111/j.1540-6261.2012.01728.x
LUKAS MENKHOFF, LUCIO SARNO, MAIK SCHMELING, ANDREAS SCHRIMPF
We investigate the relation between global foreign exchange (FX) volatility risk and the cross section of excess returns arising from popular strategies that borrow in low interest rate currencies and invest in high interest rate currencies, so‐called “carry trades.” We find that high interest rate currencies are negatively related to innovations in global FX volatility, and thus deliver low returns in times of unexpected high volatility, when low interest rate currencies provide a hedge by yielding positive returns. Furthermore, we show that volatility risk dominates liquidity risk and our volatility risk proxy also performs well for pricing returns of other portfolios.