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Order Flow and Exchange Rate Dynamics

Posted: 25 Jan 2002

See all articles by Martin D.D. Evans

Martin D.D. Evans

Georgetown University - Department of Economics

Richard K. Lyons

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

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Abstract

This paper presents an exchange rate model of a new kind. Instead of relying exclusively on macroeconomic determinants, the model includes a determinant from the field of microstructure finance - order flow. Order flow is a determinant because it conveys information. This is a radically different approach to exchange rates. It is also strikingly successful. Our model of daily deutsche mark/dollar log changes produces an R2 statistic above 60 percent. For the deutsche mark/dollar spot market as a whole, we find that $1 billion of net dollar purchases increases the deutsche mark price of a dollar by 0.5 percent.

Suggested Citation

Evans, Martin D.D. and Lyons, Richard K., Order Flow and Exchange Rate Dynamics. Available at SSRN: https://ssrn.com/abstract=295071

Martin D.D. Evans

Georgetown University - Department of Economics ( email )

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

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

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