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Local Information in Foreign Exchange Markets

Autor: Lukas Menkhoff and Maik Schmeling
Nummer: 331, Apr 2006, pp. 31
JEL-Class: F31, D82

This study shows that order flow in a foreign exchange market only has permanent price impact if it comes from certain regions. These regions are - as predicted by the local information hypothesis - centers of political and financial decision making. It is revealing that orders from other regions only show a very short-lived but no permanent price impact. Local information is so important that it carries over from the usually considered market orders to aggressively-priced limit orders too. The finding is robust to various market conditions, common news shocks and consideration of feedback trading.


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