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Order Flow and Exchange Rate Dynamics in Brazil

Author

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  • Otavio De Medeiros

    (Universidade de Brasilia, Brazil)

Abstract

The paper presents results of empirical tests with hybrid nominal exchange rate models for the Brazilian foreign exchange market, using macroeconomic and market microstructure variables. The basic model was originally proposed and tested in the German (DM/US$) and the Japanese (¥/US$) foreign exchange markets by Evans and Lyons (2002). We applied the model to the Brazilian foreign exchange market (R$/US$) and obtained significant and correctly signaled coefficients, but the regressions showed low R2s, suggesting the omission of relevant variable(s). The inclusion of an additional variable representing a country-risk premium results significant and increases R2. Estimation by GARCH further improves previous results obtained by OLS. The upshot indicates that the route proposed by Evans and Lyons is a promising explanation for the R$/US$ exchange rate, but it seems the model specification needs further improvement.

Suggested Citation

  • Otavio De Medeiros, 2005. "Order Flow and Exchange Rate Dynamics in Brazil," Finance 0503019, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0503019
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    References listed on IDEAS

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    3. Katusiime, Lorna & Shamsuddin, Abul & Agbola, Frank W., 2015. "Macroeconomic and market microstructure modelling of Ugandan exchange rate," Economic Modelling, Elsevier, vol. 45(C), pages 175-186.

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    More about this item

    Keywords

    exchange rate; market microstructure; country risk; order flow; Brazil;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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