Exchange Rate Forecasting, Order Flow and Macroeconomic Information

51 Pages Posted: 7 Apr 2009

See all articles by Dagfinn Rime

Dagfinn Rime

BI Norwegian Business School

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Elvira Sojli

UNSW Business School, School of Banking and Finance

Date Written: March 2009

Abstract

This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data collected via a live feed from Reuters for three major exchange rates, we find that: i) order flow is intimately related to a broad set of current and expected macroeconomic fundamentals; ii) more importantly, order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise, on the basis of economic value criteria such as Sharpe ratios and performance fees implied by utility calculations.

Keywords: exchange rates, forecasting, macroeconomic news, microstructure, order flow

JEL Classification: F31, F41, G10

Suggested Citation

Rime, Dagfinn and Sarno, Lucio and Sojli, Elvira, Exchange Rate Forecasting, Order Flow and Macroeconomic Information (March 2009). CEPR Discussion Paper No. DP7225. Available at SSRN: https://ssrn.com/abstract=1372545

Dagfinn Rime

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
+47-46410507 (Phone)

HOME PAGE: http://home.bi.no/dagfinn.rime/

Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Elvira Sojli

UNSW Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://sites.google.com/site/esojli/

Register to save articles to
your library

Register

Paper statistics

Downloads
5
Abstract Views
722
PlumX Metrics