Risk research: Exchange rate determination and inter-market order flow effects

Exchange rate determination and inter-market order flow effects

Daníelsson, J., J. Luo, and R. G. Payne (2012). Exchange rate determination and inter–market order ﬂow effects. European Journal of Finance.

The dependence of foreign exchange rates on order flow is investigated for four major exchange rate pairs, EUR/USD, EUR/GBP, GBP/USD and USD/JPY, across sampling frequencies ranging from 5 minutes to 1 week. Strong dependence and explanatory power is discovered across sampling frequencies. In a new result, inter--market effect of order flows is discovered, where the GBP exchange rate is dominated by EUR/USD order flow. The Meese and Rogoff (1983a,b) framework is used to investigate the forecasting power of order flow and it is shown that the order flow specifications reduce RMSEs, relative to a random walk, for virtually all exchange rates and sampling frequencies.

@ARTICLE{DanielssonLuoPayne2012,
  author =  {J{\'o}n Dan{\'i}elsson and Jinhui Luo and Richard G.
                  Payne},
  title =   {Exchange rate determination and inter--market order flow
                  effects},
  journal = "European Journal of Finance",
  year =    2012,
  url =     {www.RiskResearch.org},
 }

Liquidity determination in an order driven market

Fat tails, VaR and subadditivity