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Feedback trading This paper is also available at www.riskresearch.org

Author

Listed:
  • Jón Daníelsson

    (Financial Markets Group, London School of Economics and Political Science, UK)

  • Ryan Love

    (Financial Markets Group, London School of Economics and Political Science, UK)

Abstract

Order flow has been found to carry information to the market. When assessing how informative order flow is, the VAR methodology is typically employed, using impulse response functions. However, in such analyses, the direction of causality runs explicitly from order flow to asset return. If data are sampled at anything other than at the highest frequencies then any feedback trading may well appear contemporaneous; trading in period t depends on the asset return in that interval. The implications of contemporaneous feedback trading are examined in the spot USD|EUR currency market and we find that when data are sampled at the 1 and 5 minute frequencies, such trading strategies cause the price impact of order flow to be significantly larger than when feedback trading is ruled out. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Jón Daníelsson & Ryan Love, 2006. "Feedback trading This paper is also available at www.riskresearch.org," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 35-53.
    • Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:1:p:35-53
    DOI: 10.1002/ijfe.286
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    References listed on IDEAS

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    Cited by:

    1. Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010. "Exchange rate forecasting, order flow and macroeconomic information," Journal of International Economics, Elsevier, vol. 80(1), pages 72-88, January.

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