Informational integration and FX trading

Exchange rates and order flow in the long run

“…6 They also note that their indicator of order flows takes no account of the volume of currency traded, but is simply the difference between the number of seller-initiated and buyer-initiated trades. 7 The relationship between the spot rates and the cumulated order flow is shown in Figure 1. 8 Both series are highly persistent and we confirmed that unit-root tests are unable to reject the null hypothesis that any of the spot exchange rate or cumulated order flow series are I(1).…”

“…6 Evans and Lyons (2002a), p. 817. 7 Ibid. As mentioned above, this is the same measure of order flow used by Bjonnes and Rime (2005).…”

“…Recent papers have underlined the importance of the market microstructure in part by documenting statistical relationships between order flows and spot exchange rates. For example, Evans and Lyons (2002) study the DEM/USD market and find that they can explain 50% of the exchange rate movement between the Deutch mark and the US dollar using only the variation in the order flow on that market. They estimate that a demand side imbalance (a positive order flow) of one billion USD increases the value of the USD by 0.5%.…”

Foreign Exchange Market: Institutional Structure, Regulation, and Policy Implications

“…Since the seminal work of Meese and Rogoff argued that the existing model of exchange rate based on macroeconomic fundamentals could not reliably outperform the "naïve" alternative of the random walk forecast for yearly changes in major currency exchange rates, the predictability of the foreign exchange rate movements has been examined extensively [4]. However, no one has yet been able to uncover macroeconomic fundamentals that could explain a modest fraction of the changes of the exchange rate in the real world [5]. Frankel and Rose describe the traditional empirical research on exchange rate as "… the case for macroeconomic determinants of exchange rates is in a sorry state" [6].…”

“…Frankel and Rose describe the traditional empirical research on exchange rate as "… the case for macroeconomic determinants of exchange rates is in a sorry state" [6]. Since the mid-1990s, with the availability of proprietary data from the large dealing banks, research on foreign exchange microstructure, or so-called "the new micro exchange rates economics" [5], has accelerated. The researchers on FX market microstructure make an attempt to understand the mechanisms generating those deviations from macro fundamentals at short time horizons, which is of great importance for practitioners and regulators (e.g., [7,8,9]).…”