Short-Run Exchange-Rate Dynamics: Theory and Evidence

CREATES Research Paper 2008-1

58 Pages Posted: 19 Jun 2008

See all articles by John A. Carlson

John A. Carlson

Purdue University - Department of Economics

Christian Dahl

affiliation not provided to SSRN

Carol L. Osler

Brandeis University - International Business School

Date Written: July 1, 2008

Abstract

Recent research has revealed a wealth of information about the microeconomics of currency markets and thus the determination of exchange rates at short horizons. This information is valuable to us as scientists since, like evidence of macroeconomic regularities, it can provide critical guidance for designing exchange-rate models. This paper presents an optimizing model of short-run exchange-rate dynamics consistent with both the micro evidence and the macro evidence, the first such model of which we are aware. With respect to microeconomics, the model is consistent with the institutional structure of currency markets, it accurately reflects the constraints and objectives faced by the major participants, and it fits key stylized facts concerning returns and order flow. With respect to macroeconomics, the model is consistent with most of the major puzzles that have emerged under floating rates.

Keywords: Exchange-rate dynamics, currency market microstructure

JEL Classification: F31, G12, G15

Suggested Citation

Carlson, John A. and Dahl, Christian and Osler, Carol L., Short-Run Exchange-Rate Dynamics: Theory and Evidence (July 1, 2008). CREATES Research Paper 2008-1. Available at SSRN: https://ssrn.com/abstract=1148125 or http://dx.doi.org/10.2139/ssrn.1148125

John A. Carlson (Contact Author)

Purdue University - Department of Economics ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

Christian Dahl

affiliation not provided to SSRN

Carol L. Osler

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States
781-736-4826 (Phone)

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