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Foreign exchange order fl ow as a risk factor

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  • Craig Burnside
  • Mario Cerrato
  • Zhekai Zhang

Abstract

This paper proposes a set of novel pricing factors for currency returns that are mo- tivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order fl ow data to provide direct measures of buying and selling pressure related to carry trading and momentum strategies. We find that they appear to be good proxies for currency crash risk. Additionally, we show that the association between our order-fl ow factors and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial cus- tomers are risk takers in the market, while non-financial customers serve as liquidity providers.

Suggested Citation

  • Craig Burnside & Mario Cerrato & Zhekai Zhang, 2018. "Foreign exchange order fl ow as a risk factor," Working Papers 2018_04, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2018_04
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    More about this item

    Keywords

    foreign; exchange; order fl ow; risk factor.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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