Private Information, Stock Markets, And Exchange Rates

Explaining exchange rates has long been an important but vexing issue in international economics and finance. In recent years, a number of studies have shown that investors' private information plays a central role in determining exchange rates. The authors demonstrate in this paper that the private information of investors relevant for exchange rates is largely connected to the stock market, and that this information is conveyed to foreign exchange (FX) markets by order flow that is induced by investors' transactions in the stock market.