Timing Exchange Rates Using Order Flow: The Case of the Loonie

36 Pages Posted: 10 Mar 2010

See all articles by Michael R. King

Michael R. King

Gustavson School Of Business

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Elvira Sojli

UNSW Australia Business School, School of Banking and Finance

Date Written: March 8, 2010

Abstract

This paper examines the relation between the Canadian dollar / US dollar (CAD) exchange rate and foreign exchange order flow employing a novel data set on CAD order flow over the period 1994-2005. We investigate empirically the predictive information content and the determinants of order flow. The results suggest that order flow has strong out-of-sample predictive power for CAD returns, yielding significant market timing ability and tangible economic gains in a stylized dynamic asset allocation context. In terms of its determinants, order flow appears to reflect not only the menu of macroeconomic variables typically suggested in the literature but is also closely related to commodity price fluctuations, as expected from a 'commodity currency.'

Keywords: Order flow, Canadian dollar, Future commodity

JEL Classification: E44, F31, G10

Suggested Citation

King, Michael Robert and Sarno, Lucio and Sojli, Elvira, Timing Exchange Rates Using Order Flow: The Case of the Loonie (March 8, 2010). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1566895 or http://dx.doi.org/10.2139/ssrn.1566895

Michael Robert King

Gustavson School Of Business ( email )

University of Victoria
Business & Economics Building, Room 246
Victoria, British Columbia V8W 2Y2
Canada
250-721-6425 (Phone)

HOME PAGE: http://https://www.uvic.ca/gustavson/faculty/faculty/faculty/current/kingm.php

Lucio Sarno

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Elvira Sojli (Contact Author)

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

Sydney, NSW 2052
Australia

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