Macroeconomic Order Flows: Explaining Equity and Exchange Rate Returns

27 Pages Posted: 6 Dec 2004

See all articles by Peter G. Dunne

Peter G. Dunne

Central Bank of Ireland

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Michael Moore

University of Warwick - Warwick Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 29, 2004

Abstract

Macroeconomic models of equity returns perform poorly. The proportion of daily index returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, our model includes a concept from microstructure - order flow. Order flow is the proximate determinant of price in all microstructure models. We explain aggregate equity returns as well as exchange rates in a model with heterogenous beliefs. Belief changes are shown to be observable through order flow. To test the model we construct daily aggregate order flow data from all equity trades in the U.S. and France from 1999 to 2003. Almost 60 percent of the daily returns in the S&P100 index is explained jointly by exchange rate returns and macroeconomic order flows.

Keywords: International macroeconomics, equities, exchange rates, microstructure

JEL Classification: F3, F31, G1, G15

Suggested Citation

Dunne, Peter G. and Hau, Harald and Moore, Michael John, Macroeconomic Order Flows: Explaining Equity and Exchange Rate Returns (November 29, 2004). WBS Finance Group Research Paper No. 35, Available at SSRN: https://ssrn.com/abstract=626852 or http://dx.doi.org/10.2139/ssrn.626852

Peter G. Dunne

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Michael John Moore (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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