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Exchange rate determination and inter–market order flow effects

Danielsson, Jon and Luo, Jinhui and Payne, Richard (2012) Exchange rate determination and inter–market order flow effects. European Journal of Finance, 18 (9). pp. 823-840. ISSN 1351-847X

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Identification Number: 10.1080/1351847X.2011.601655

Abstract

The dependence of foreign exchange rates on order flow is investigated for four major exchange rate pairs, EUR/USD, EUR/GBP, GBP/USD and USD/JPY, across sampling frequencies ranging from 5 min to 1 week. Strong explanatory power is discovered for all sampling frequencies. We also uncover cross-market order flow effects, e.g. GBP exchange rates are very strongly influenced by EUR/USD order flow. We proceed to investigate the predictive power of order flow for exchange rate changes, and it is shown that the order flow specifications reduce RMSEs relative to a random walk for all exchange rates at high-frequencies and for EUR/USD and USD/JPY at lower sampling frequencies.

Item Type: Article
Official URL: http://www.tandfonline.com/toc/rejf20/current
Additional Information: © 2012 Copyright Taylor and Francis Group, LLC.
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 19 Apr 2013 12:09
Last Modified: 30 May 2014 15:07
URI: http://eprints.lse.ac.uk/id/eprint/37422

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