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Order Flow and Exchange Rate Dynamics

Richard K. Lyons

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

Martin D.D. Evans

Georgetown University - Department of Economics

January 19, 2001

Eleventh Annual Utah Winter Conference

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.

Number of Pages in PDF File: 46

JEL Classification: F31, G15

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Date posted: September 23, 1999  

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

Contact Information

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)
Feedback to SSRN

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References:  76
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