Conclusion
The Tokyo experiment provides four facts that support the presence of information that both is not publicly available and is important for exchange rate movements. First, the volatility of the yen/dollar rate over the lunch hour increases significantly when the trading restriction is lifted. This volatility increase cannot be due to public information since there was no change in the timing of macroeconomic announcements. Second, allowing trade over lunch produces a more even volatility pattern over the full day. This is a natural consequence of informative trades being redirected toward the lunch hour. Third, when Tokyo took a lunch break there was a significant increase in volatility just before the break. Models based on non-public information predict this: traders with superior information will choose to trade before the break to ensure that prices cannot adjust before they have opened a position. Finally, allowing trade over lunch causes the increase in pre-lunch volatility to disappear. Models based on non-public information also predict this: since there is no longer a break, traders with superior information do not face the same pressure to trade in the pre-lunch period. In sum, non-public information provides a powerful driver of trading volume, one that plays no role under the traditional macro-oriented asset market approach to exchange rates.
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