Order flow and exchange rate dynamics in electronic brokerage system data

Abstract

We analyze the association between order flow and exchange rates using a new dataset representing a majority of global interdealer transactions in the two most-traded currency pairs at the one minute frequency over a six-year time period. This long span of highfrequency data allows us to gain new insights about the joint behavior of these series. We first confirm the presence of a substantial association between interdealer order flow and exchange rate returns at horizons ranging from 1 min to two weeks, but find that the association is substantially weaker at longer horizons. We study the time-variation of the association between exchange rate returns and order flow both intradaily and over the long term, and show that the relationship appears to be stronger when market liquidity is lower. Overall, our study supports the view that liquidity effects play an important role in the relationship between order flow and exchange rate changes. This by no means rules out a role for order flow as a channel by which fundamental information is transmitted to the market, as we show that our findings are quite consistent with a recent model by Bacchetta and Van Wincoop (2006: Can information heterogeneity explain the exchange rate determination puzzle? American Economic Review, 96, pp. 552-576.) that combines both liquidity and information effects.

The impact of FX intervention on FX markets: a market microstructure analysis

“…Thus, imbalances between buy and sell orders possess a large and persistent impact on currency values as confirmed among others by Lyons (1995), Evans and Lyons (2002), Payne (2003) and Berger et al (2008). In addition, equations (3.1) and (3.2) implies that the spot rate and cumulative order flow are cointegrated, as suggested empirically by Biønnes and Rime (2005).…”

El papel de las posiciones netas de los especuladores en el proceso de formación de precios en un régimen de flotación. Evidencia de un modelo SVAR cointegrado para México

“…Este hallazgo está asociado con la existencia de un comovimiento de largo plazo (vector de cointegración) entre los diferenciales de las posiciones netas de los especuladores, el tipo de cambio y la tasa de interés en un modelo que utiliza datos diarios del tipo de cambio franco-alemán. Asimismo, Berger et al (2008), mediante el uso de datos detallados al minuto, muestran que existe evidencia en contra de una explicación basada puramente en información de la relación que existe entre las posiciones netas de los especuladores y los tipos de cambio. Sostienen que se pueden obtener mejores modelos de tipo de cambio al combinar los efectos tanto de la liquidez como de la información en los modelos econométricos.…”

“…Existen diferentes puntos de vista acerca de los canales de transmisión de las posiciones netas de los especuladores a los tipos de cambio. Entre ellos, tenemos los puntos de vista llamados strong flow-centric y weak flowcentric (Froot y Ramadorai, 2005;Berger, et al, 2008). El primero propone que las posiciones netas de los especuladores tienen un impacto permanente sobre los tipos de cambio y presentan datos acerca de la información macroeconómica fundamental hacia el mercado, el llamado "canal de información".…”

Micro Approaches to Foreign Exchange Determination

“…For example, Bjønnes et al (2010) and Marsh and O'Rourke (2005) argue that differential price-impact of order flow across counterparties is an indication that order flow carries fundamental information, while Froot and Ramadorai (2005) and Berger et al (2008) suggest that the explanatory power of order flow primarily stems from liquidity disruptions. Assessing the validity of these interpretations is very difficult without a theoretical model that allows for both possibilities.…”