IS THERE PRIVATE INFORMATION IN THE FX MARKET - THE TOKYO EXPERIMENT

We provide evidence of private information in the foreign exchange mar ket. The evidence comes from the introduction of trading in Tokyo over the lunch hour. Lunch-return variance doubles with the introduction o f trading, which cannot be due to public information since the flow of public information did not change with the trading rules. We then exp loit microstructure theory to discriminate between the two alternative s: private information and mispricing. Four key results support the pr edictions of private-information models. Three of these involve change s in the intraday volatility U-shape. The fourth is that opening trade causes mispricing's share in variance to fall.