The Journal of Finance

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

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00045

Takatoshi Ito, Richard K. Lyons, Michael T. Melvin

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.