Marketwide Private Information in Stocks: Forecasting Currency Returns |
| |
| Authors: | RUI ALBUQUERQUE EVA DE FRANCISCO LUIS B MARQUES |
| |
| Institution: | Albuquerque is at the Boston University School of Management and with CEPR. De Francisco is at the Department of Economics at Towson University. Marques is at the Paul H. Nitze School of Advanced International Studies, Johns Hopkins University and with CEMPRE. We thank Marine Carrasco and Werner Ploberger for useful discussions and Clara Vega for many detailed comments on an earlier version of the paper. We also thank seminar participants at the Bank of Portugal, Instituto de Empresa Business School in Madrid, the University of Rochester and the Federal Reserve Board for comments. The paper has greatly benefited from comments by an anonymous referee and an associate editor. Marques thanks Funda??o para a Ciência e a Tecnologia, Portugal, for financial support. The usual disclaimer applies. |
| |
| Abstract: | We present a model of equity trading with informed and uninformed investors where informed investors trade on firm‐specific and marketwide private information. The model is used to identify the component of order flow due to marketwide private information. Estimated trades driven by marketwide private information display little or no correlation with the first principal component in order flow. Indeed, we find that co‐movement in order flow captures variation mostly in liquidity trades. Marketwide private information obtained from equity market data forecasts industry stock returns, and also currency returns. |
| |
| Keywords: | |
|
|
