End-User Order Flow and Exchange Rate Dynamics
Deutsche Bundesbank Discussion Paper No. 05/2007
28 Pages Posted: 10 Jul 2008
Date Written: February 8, 2008
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
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