Foreign Exchange Speculation:  An Event Study

Robert Hayward

doi:10.3390/ijfs6010022

Foreign Exchange Speculation: An Event Study

Research output: Contribution to journal › Article › peer-review

Abstract

Does speculation facilitate price discovery or instability? If it is price discovery, it is beneficial and should be encouraged; if it is instability, welfare is enhanced by its reduction. This paper seeks to distinguish between these two characteristics by analysing those times when speculation in the foreign exchange market is most extreme. A series of event studies are conducted on the extremes of speculative sentiment and speculative activity. If speculation is noise, extreme
sentiment and extreme positions should lead to overshooting and increase risk of subsequent reversals. The finding that speculative extremes do not provide information about subsequent returns implies that speculation is part of the process of price discovery and that efforts to reduce it would reduce
the informational efficiency of financial markets.

Original language	English
Article number	22
Journal	International Journal of Financial Studies
Volume	6
Issue number	1
DOIs	https://doi.org/10.3390/ijfs6010022
Publication status	Published - 17 Feb 2018

Bibliographical note

© 2018 by the author. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).

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abstract = "Does speculation facilitate price discovery or instability? If it is price discovery, it is beneficial and should be encouraged; if it is instability, welfare is enhanced by its reduction. This paper seeks to distinguish between these two characteristics by analysing those times when speculation in the foreign exchange market is most extreme. A series of event studies are conducted on the extremes of speculative sentiment and speculative activity. If speculation is noise, extremesentiment and extreme positions should lead to overshooting and increase risk of subsequent reversals. The finding that speculative extremes do not provide information about subsequent returns implies that speculation is part of the process of price discovery and that efforts to reduce it would reducethe informational efficiency of financial markets.",

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Foreign Exchange Speculation: An Event Study

Abstract

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