Exploiting Low Volume in Currency Trading

Does low volume in currency exchange markets expose exploitable inefficiencies? In their August 2017 paper entitled “The Value of Volume in Foreign Exchange”, Antonio Gargano, Steven Riddiough and Lucio Sarno investigate whether currency trading volumes (including spot, swap and forward) exploitably predict currency returns. They first measure interactions of trading volumes and returns statistically. They then assess gross economic import via portfolios formed from daily double-sorts first on prior-day returns and then on prior-day trading volumes, focusing on a portfolio that is each day long (short) currency pairs with low (high) prior returns and low trading volumes. Finally, they incorporate bid-ask spreads to determine whether net portfolio performance is attractive. Using hourly spot, swap and forward trading volumes and their daily returns across 31 currency pairs during November 2011 through December 2016, they find that:

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