Order Flow and Exchange Rate Dynamics

46 Pages Posted: 23 Sep 1999  

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

Martin D.D. Evans

Georgetown University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 19, 2001

Abstract

Macroeconomic models of nominal exchange rates perform poorly. The propor-tion of monthly exchange rate changes that these models can explain is essen-tially zero. This paper presents a model of a new kind. Instead of relying exclu-sively on macroeconomic determinants, the model includes a determinant from the field of microstructure?order flow. Order flow is the proximate determinant of price in all microstructure models. This is a radically different approach to ex-change rate determination. It is also strikingly successful in accounting for real-ized rates. Our model of daily changes in log exchange rates produces R 2 statis-tics above 60 percent. For the DM/$ spot market, we find that $1 billion of net dollar purchases increases the DM price of a dollar by about 0.5 percent.

JEL Classification: F31, G15

Suggested Citation

Lyons, Richard K. and Evans, Martin D.D., Order Flow and Exchange Rate Dynamics (January 19, 2001). Eleventh Annual Utah Winter Conference. Available at SSRN: https://ssrn.com/abstract=174888 or http://dx.doi.org/10.2139/ssrn.174888

Richard K. Lyons (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-642-1059 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Martin D.D. Evans

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-1570 (Phone)
202-687-6102 (Fax)

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