Tokyo insiders and the informational efficiency of the yen/dollar exchange rate

When there is a high concentration of informed yen/dollar traders active in Tokyo, theory suggests that there should be a faster adjustment of the yen/dollar exchange rate to the full‐information level. We exploit the data during a period believed to contain a high concentration of informed Japanese traders in order to test this hypothesis. Comparing the period of informed trader clustering to a similar period without the informed, we find that yen/dollar exchange rate quotes adjust to full‐information levels three times faster when the informed are active than when they are not. These results are consistent with a view of the foreign exchange market where private information is at times quite important. Copyright © 2005 John Wiley & Sons, Ltd.