End-User Order Flow and Exchange Rate Dynamics

44 Pages Posted: 8 Jun 2016

See all articles by Stefan Reitz

Stefan Reitz

German Federal Bank - Economics Department

Markus A. Schmidt

Deutsche Bundesbank

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR)

Date Written: 2007

Abstract

In this paper we provide evidence for Evans and Lyons' (2005b) model of an information aggregation process in FX markets using a German bank's end-user order flow from 2002 to 2003. Though customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the widespread optimism in the market microstructure literature that customer order flow is the high-powered source of information easily exploitable for short-run speculation. Moreover, commercial customers' order flow produces negative coefficients in contemporaneous return regressions, stressing their role as liquidity providers.

Keywords: Foreign exchange, market microstructure, end-user order flow

JEL Classification: F31

Suggested Citation

Reitz, Stefan and Schmidt, Markus A. and Taylor, Mark Peter, End-User Order Flow and Exchange Rate Dynamics (2007). Bundesbank Series 1 Discussion Paper No. 2007,05. Available at SSRN: https://ssrn.com/abstract=2785280

Stefan Reitz

German Federal Bank - Economics Department ( email )

Wilhelm-Epstein-Str. 14
60431 Frankfurt
Germany

Markus A. Schmidt

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Mark Peter Taylor (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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