Macroeconomic Order Flows: Explaining Equity and Exchange Rate Returns

Dunne, Peter G.; Hau, Harald; Moore, Michael

Purchase - $8 CEPR Subscribers Download

Add Paper to My Library

Macroeconomic Order Flows: Explaining Equity and Exchange Rate Returns

30 Pages Posted: 4 Apr 2005

See all articles by Peter G. Dunne

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

There are 2 versions of this paper

Date Written: December 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% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and macroeconomic order flows.

Keywords: International macroeconomics, equities, exchange rates, microstructure

JEL Classification: F30, F31, G10, G15

Suggested Citation: Suggested Citation

Dunne, Peter G. and Hau, Harald and Moore, Michael John, Macroeconomic Order Flows: Explaining Equity and Exchange Rate Returns (December 2004). Available at SSRN: https://ssrn.com/abstract=697921