Does Foreign Exchange Volume Activity Predict Foreign Exchange Returns? Evidence from Buy-Sell Volume in the Euro-Dollar Market

David Spohn


This paper investigates the predictive ability of lagged buy-sell volume on current foreign exchange returns. Using novel Euro-Dollar foreign exchange market data from 2007 to 2015, we show that the buy-sell volume has an inverse correlation with current foreign exchange returns. Using conditional regression analysis, buy-sell volumes predict subsequent Euro-Dollar returns. We divide the data into two sub-samples. We use the first sub-sample to create a trading rule, and we use the second sub-sample to test the rule. After adjusting for time-varying calendar effects, we find that a profitable trading strategy exists using only buy-sell volume to predict returns.

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Applied Finance and Accounting (AFA)        

ISSN 2374-2410(Print)           ISSN 2374-2429(Online)

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