Noisy Information and Expectation Formation in the Foreign Exchange Market

34 Pages Posted: 9 Dec 2015 Last revised: 21 Dec 2016

Alex Luiz Ferreira

University of São Paulo

Michael Moore

University of Warwick - Warwick Business School

Satrajit Mukherjee

Ghent University - Department of Financial Economics

Date Written: December 15, 2015

Abstract

Market microstructure and the imperfect common knowledge literature in macroeconomics both analyze the effect of dispersed information on prices. This paper draws on both sources to understand exchange rate forecasting errors. A theoretical model is developed showing that forecasting errors depend on both forecast revisions as in the Woodford noisy information model and order flow as in the Evans-Lyons simultaneous trade model. This is applied to Brazilian data using a unique data set of daily consensus exchange rate forecasts managed by the Banco Central do Brasil along with order flow derived from the FX futures market. The results strongly support the theory.

Keywords: Noisy Information, Microstructure, Order Flow, Exchange Rates

JEL Classification: F31, F37, G14, D82

Suggested Citation

Ferreira, Alex Luiz and Moore, Michael and Mukherjee, Satrajit, Noisy Information and Expectation Formation in the Foreign Exchange Market (December 15, 2015). Available at SSRN: https://ssrn.com/abstract=2700350 or http://dx.doi.org/10.2139/ssrn.2700350

Alex Luiz Ferreira

University of São Paulo ( email )

Av. Bandeirantes 3900 - Monte Alegre
Ribeião Preto, 14040-900
Brazil

Michael John Moore (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Satrajit Mukherjee

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, East Flanders B9000
Belgium

Paper statistics

Downloads
94
Rank
231,123
Abstract Views
565