Order Flow Information and Spot Rate Dynamics

34 Pages Posted: 23 Apr 2015

See all articles by Martin D.D. Evans

Martin D.D. Evans

Georgetown University - Department of Economics

Dagfinn Rime

BI Norwegian Business School

Date Written: April 21, 2015

Abstract

This paper examines why order flows are empirically important drivers of spot exchange rate dynamics. We consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental information about future interest rate differentials, risk premiums and/or long-run exchange rate levels (i.e., information that cannot be inferred from publicly observed variables). We estimate the importance of these incremental information flows for the EURNOK spot exchange rate using eight years of high-quality, disaggregated, end-user order flow data collected by the Norges Bank.

Keywords: Exchange Rate Dynamics, Microstructure, Order Flow

JEL Classification: F3, F4, G1

Suggested Citation

Evans, Martin D.D. and Rime, Dagfinn, Order Flow Information and Spot Rate Dynamics (April 21, 2015). Available at SSRN: https://ssrn.com/abstract=2597383 or http://dx.doi.org/10.2139/ssrn.2597383

Martin D.D. Evans (Contact Author)

Georgetown University - Department of Economics ( email )

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

Dagfinn Rime

BI Norwegian Business School ( email )

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

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

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