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Exchange Rate Determination and Forecasting: Can the Microstructure Approach Rescue Us from the Exchange Rate Disparity?

Author

Listed:
  • Zhang, Guangfeng
  • Zhang, Qiong
  • Majeed, Muhammad Tariq

Abstract

Using two measures of private information and high-frequency transaction data from the leading interdealer electronic broking system Reuters D2000-2, we examine the association between exchange rate return and contemporaneous order flow and the predictability power of lagged order flow on the future exchange rate return. Our empirical analysis demonstrates that at high frequency (5, 10, 15, 20, 25, and 30 min) there exists strong positive association between exchange rate returns and contemporaneous order flow. However, the results indicate weak predictability of order flow on the future exchange rate return.

Suggested Citation

  • Zhang, Guangfeng & Zhang, Qiong & Majeed, Muhammad Tariq, 2013. "Exchange Rate Determination and Forecasting: Can the Microstructure Approach Rescue Us from the Exchange Rate Disparity?," MPRA Paper 57673, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:57673
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    File URL: https://mpra.ub.uni-muenchen.de/57673/1/MPRA_paper_57673.pdf
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    References listed on IDEAS

    as
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    2. Hasbrouck, Joel, 1991. "Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    3. 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.
    4. Love, Ryan & Payne, Richard, 2008. "Macroeconomic News, Order Flows, and Exchange Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(2), pages 467-488, June.
    5. Takatoshi Ito & Yuko Hashimoto, 2008. "Price Impacts of Deals and Predictability of the Exchange Rate Movements," NBER Chapters, in: International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy, pages 177-217, National Bureau of Economic Research, Inc.
    6. Martin D. D. Evans & Richard K. Lyons, 2017. "Understanding Order Flow," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 13, pages 507-546, World Scientific Publishing Co. Pte. Ltd..
    7. Rime, Dagfinn, 2001. "U.S. Exchange Rates and Currency Flows," SIFR Research Report Series 4, Institute for Financial Research.
    8. 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.
    9. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
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    Cited by:

    1. Kartono, Agus & Solekha, Siti & Sumaryada, Tony & Irmansyah,, 2021. "Foreign currency exchange rate prediction using non-linear Schrödinger equations with economic fundamental parameters," Chaos, Solitons & Fractals, Elsevier, vol. 152(C).

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    More about this item

    Keywords

    Exchange Rate; Forecasting; Microstructure Approach;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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