Order flow information and spot rate dynamics

This paper examines why order flows are empirically important drivers of spot exchange rate dynamics. We consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental inform...

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Bibliographic Details
Published in:Journal of international money and finance 2016-12, Vol.69, p.45-68
Main Authors: Evans, Martin D.D., Rime, Dagfinn
Format: Article
Language:English
Subjects:
Data collection
Depreciation rates
Exchange rate dynamics
Exchange rates
Foreign exchange rates
Interest rates
Microstructure
Norges Bank
Norway
Order flow
Risk premiums
Studies
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Summary:This paper examines why order flows are empirically important drivers of spot exchange rate dynamics. We consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental information about future interest rate differentials, risk premiums and/or long-run exchange rate levels (i.e., information that cannot be inferred from publicly observed variables). We estimate the importance of these incremental information flows for the EURNOK spot exchange rate using eight years of high-quality, disaggregated, end-user order flow data collected by the Norges Bank.
ISSN:0261-5606
1873-0639
DOI:10.1016/j.jimonfin.2016.06.018