Inventory information

When information about fundamentals is symmetric, can information-based trade still arise? Consider bond and foreign exchange (FX) markets, where private information about nominal cash flows is generally absent, but participants are convinced that superior information exists. We analyze a class of asymmetric information-inventory information-that is unrelated to fundamentals but still forecasts future price (by forecasting future discount factors). We find that inventory information in FX does indeed forecast discount factors and does so over both short and long horizons. The permanent effect from inventory information ranges between 15% and 30% of that from public information.