Foreign Exchange Speculation: An Event Study

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    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 languageEnglish
    Article number22
    JournalInternational Journal of Financial Studies
    Issue number1
    Publication statusPublished - 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 (


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