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Order flow information and spot rate dynamics

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  • Evans, Martin D.D.
  • Rime, Dagfinn

Abstract

This paper examines why order flows are empirically important drivers of spot exchange rate dynamics. We consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental information about future interest rate differentials, risk premiums and/or long-run exchange rate levels (i.e., information that cannot be inferred from publicly observed variables). We estimate the importance of these incremental information flows for the EURNOK spot exchange rate using eight years of high-quality, disaggregated, end-user order flow data collected by the Norges Bank.

Suggested Citation

  • Evans, Martin D.D. & Rime, Dagfinn, 2016. "Order flow information and spot rate dynamics," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 45-68.
    • Handle: RePEc:eee:jimfin:v:69:y:2016:i:c:p:45-68
    DOI: 10.1016/j.jimonfin.2016.06.018
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    1. King, Michael & Sarno, Lucio & Sojli, Elvira, 2010. "Timing exchange rates using order flow: The case of the Loonie," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2917-2928, December.
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    More about this item

    Keywords

    Exchange rate dynamics; Microstructure; Order flow;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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