Speculation in the Foreign Exchange: Noise or Information?

An event study is used to assess the views of Keynes and Friedman on speculation. Speculative extremes are ranked by intensity of sentiment and weight of speculative activity. A unique dataset of risk-reversal skew on option prices is used to measure the intensity of speculative sentiment; the weight of positions is based on US regulatory data. The extremes say little about the future in either case, suggesting that speculation is more than just random noise and supporting the view there is some informational content that is being passed through to the price with speculative activity.