Dealer activity and macro fundamentals – New evidence from hybrid exchange rate models

Krohn, Ingomar; Moore, Michael J.

doi:10.1016/j.jimonfin.2018.03.007

Cited by 3 publications

(1 citation statement)

References 24 publications

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“…Microstructure models perform much better than the traditional exchange rate models. Empirical tests reveal that order flow explains a significant part of the exchange rate variation over short and medium horizons (Evans and Lyons, 2002;Evans, 2010;Krohn and Moore, 2019). Evidence also shows that order flow is a powerful predictor of exchange rate movements in an out-of-sample exercise (Rime et al, 2010;King et al, 2010;Menkhoff et al, 2016).…”

Section: Introductionmentioning

confidence: 92%

Information content of order flows in the FX market: importance of nonfundamental factors

Hammami

Kharrat²

2021

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PurposeThe purpose of the paper is to show that order flows determine exchange rate dynamics because they carry information about nonfundamental factors besides macroeconomic fundamentals.Design/methodology/approachTo understand the role of nonfundamental factors in driving order flows, this study uses two approaches. Initially, Evans and Rime (2016) VAR framework is followed to study the incremental information transmitted by order flow compared to macroeconomic variables. Then, the study uses the settings in which Rime et al. (2010) conduct their empirical work, which gives the researcher more latitude in specifying the identity of the factors that drive order flows.FindingsThe findings evidence that order flows explain the dynamics of the TND/USD exchange rate. The results highlight that order flows convey information about technical strategies, the currency systematic factors and political risk. This study also documents the presence of a Ramadan effect in exchange rates and order flows.Originality/valueThis study makes four contributions to the literature. First, it complements the literature on the FX microstructure of emerging markets. The study investigates the information content carried by order flows, while the previous literature has focused solely on examining the explanatory power of order flows to explain exchange rates in emerging countries. The second contribution is that the study demonstrates formally that order flows determine exchange rates because they transmit information about nonfundamental factors. Third, this study is the first to examine whether order flows convey information about technical analysis. Four, the study relates order flow to nontraditional factors that are relevant to the Tunisian FX market.

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