Common Factors, Order Flows, and Exchange Rate Dynamics

24 Pages Posted: 29 Jul 2015

See all articles by Valère Fourel

Valère Fourel

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Banque de France

Dagfinn Rime

BI Norwegian Business School

Lucio Sarno

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

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Adrien Verdelhan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: July 27, 2015

Abstract

We built the largest dataset of high-frequency exchange rates so far. Our sample covers the spot prices and order flows of 19 currency pairs over the last 15 years measured on Reuters and EBS at the thirty-second frequency. We show that common, price-based factors describe exchange rate dynamics at high frequencies at least as well as the quantity-based order flows. The same price-based factors describe exchange rates over a large spectrum of frequencies, from 30 seconds to one month. While the descriptive power of order flows decreases when frequencies decrease, the descriptive power of common factors increases.

Keywords: Exchange rates, risk premium, order flow

JEL Classification: F31, G12, G15

Suggested Citation

Fourel, Valère and Rime, Dagfinn and Sarno, Lucio and Schmeling, Maik and Verdelhan, Adrien, Common Factors, Order Flows, and Exchange Rate Dynamics (July 27, 2015). Available at SSRN: https://ssrn.com/abstract=2636607 or http://dx.doi.org/10.2139/ssrn.2636607

Valère Fourel

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Banque de France ( email )

Paris
France

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

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

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Adrien Verdelhan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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