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Exchange Rates and Order Flow in the Long Run

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Author Info
M. Martin Boyer ()
Simon van Norden ()

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Abstract

Several recent papers have underlined the importance of the microstructure effects in understanding exchange rate behavior by documenting stable long-run relationships between cumulated order flows and spot exchange rates. This stands in contrast to the widely-studied failure of exchange rates to conform to the long-run behavior implied by “conventional” macroeconomic models and is consistent with the prediction of micro-structure models. We reexamine the evidence for stable long-run relationships. We find that such evidence exists only for a small number of the major currencies we examine and that is it statistically fragile. We conclude that this implication of microstructure models does not fit the data as well as previous studies suggest.

Plusieurs études récentes ont souligné l’importance de la microstructure des marchés pour la compréhension des comportements des taux de change en documentant les relations stables à long terme entre les flux des commandes cumulées et les taux de change courants. Les résultats contrastent avec ceux de nombreuses études sur l’échec des taux de change de se conformer au comportement à long terme que supposent les modèles macroéconomiques « conventionnels » et sont conformes à la prédiction des modèles microstructurels. Nous réexaminons l’évidence de relations stables à long terme et constatons que celle-ci n’existe que dans un petit nombre des taux de change étudiés et qu’elle est fragile du point de vue statistique. Nous concluons que l’implication des modèles microstructurels ne correspond pas aux données aussi bien que des études précédentes laissent supposer.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2006s-07.

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Date of creation: 01 May 2006
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Handle: RePEc:cir:cirwor:2006s-07

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Related research
Keywords: cointegration; foreign exchange rates; order flow; microstructure; cointégration; flux de commandes; microstructure; taux de change;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Marie-Josée Godbout & Simon van Norden, 1997. "Reconsidering Cointegration in International Finance: Three Case Studies of Size Distortion in Finite Samples," Working Papers 97-1, Bank of Canada. [Downloadable!]
  2. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct. [Downloadable!]
    Other versions:
  3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  4. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  5. MacDonald, Ronald & Taylor, Mark P., 1994. "The monetary model of the exchange rate: long-run relationships, short-run dynamics and how to beat a random walk," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 276-290, June. [Downloadable!] (restricted)
  6. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Working Paper 2004/13, Norges Bank. [Downloadable!]
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  7. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February. [Downloadable!] (restricted)
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  8. Killeen, William P. & Lyons, Richard K. & Moore, Michael J., 2006. "Fixed versus flexible: Lessons from EMS order flow," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 551-579, June. [Downloadable!] (restricted)
    Other versions:
  9. Diebold, Francis X & Gardeazabal, Javier & Yilmaz, Kamil, 1994. " On Cointegration and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 727-35, June. [Downloadable!] (restricted)
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  10. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351. [Downloadable!] (restricted)
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  11. Evans, Martin D. D. & Lyons, Richard K., 2002. "Informational integration and FX trading," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 807-831, November. [Downloadable!] (restricted)
  12. Martin D. D. Evans, 2001. "FX Trading and Exchange Rate Dynamics," NBER Working Papers 8116, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
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  17. repec:cup:etheor:v:11:y:1995:i:5:p:1015-32 is not listed on IDEAS
  18. Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, vol. 42(3-4), pages 275-298, May. [Downloadable!] (restricted)
  19. Bjonnes, Geir Hoidal & Rime, Dagfinn, 2005. "Dealer behavior and trading systems in foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 75(3), pages 571-605, March. [Downloadable!] (restricted)
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  20. Rime, Dagfinn, 2001. "U.S. Exchange Rates and Currency Flows," SIFR Research Report Series 4, Institute for Financial Research. [Downloadable!]
  21. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nikola Gradojevic & Christopher J. Neely, 2008. "The dynamic interaction of order flows and the CAD/USD exchange rate," Working Papers 2008-006, Federal Reserve Bank of St. Louis. [Downloadable!]
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