End-User Order Flow and Exchange Rate Dynamics

Deutsche Bundesbank Discussion Paper No. 05/2007

28 Pages Posted: 10 Jul 2008

See all articles by Mark P. Taylor

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR); Brookings Institution

Markus A. Schmidt

Deutsche Bundesbank

Stefan Reitz

University of Giessen; Deutsche Bundesbank

Date Written: February 8, 2008

Abstract

In this paper we provide evidence for Evans and Lyons' (2005b) model of an information aggregation process in FX markets, using a rich data base on a German bank's end-user order flow from 2002 to 2003. Though customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the widespread optimism in the market microstructure literature that customer order flow is a high-powered source of information easily exploitable for short-run speculation. Moreover, commercial customers' order flow produces negative coefficients in contemporaneous return regressions, stressing their role as liquidity providers.

Keywords: foreign exchange, market microstructure, end-user order flow

JEL Classification: F31

Suggested Citation

Taylor, Mark P. and Schmidt, Markus A. and Reitz, Stefan and Reitz, Stefan, End-User Order Flow and Exchange Rate Dynamics (February 8, 2008). Deutsche Bundesbank Discussion Paper No. 05/2007, Available at SSRN: https://ssrn.com/abstract=1157681 or http://dx.doi.org/10.2139/ssrn.1157681

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Markus A. Schmidt

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Stefan Reitz (Contact Author)

University of Giessen ( email )

Volkswirtschaftslehre III
Licher Str. 66
D-35394 Giessen
Germany
+49-641-9922114 (Phone)
+49-641-9922119 (Fax)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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