Foreign Exchange Order Flow as a Risk Factor

54 Pages Posted: 26 May 2020

See all articles by A. Craig Burnside

A. Craig Burnside

Duke University - Department of Economics; University of Glasgow - Department of Economics; National Bureau of Economic Research (NBER)

Mario Cerrato

Glasgow University

Zhekai Zhang

University of Glasgow

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020


This paper proposes a set of novel pricing factors for currency returns that are motivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order flow data to provide direct measures of buying and selling pressure related to carry trading and momentum strategies. We find that they appear to be good proxies for currency crash risk. Additionally, we show that the association between our order-flow factors and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk takers in the market, while non-financial customers serve as liquidity providers.

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Suggested Citation

Burnside, Craig and Cerrato, Mario and Zhang, Zhekai, Foreign Exchange Order Flow as a Risk Factor (May 2020). NBER Working Paper No. w27199, Available at SSRN:

Craig Burnside (Contact Author)

Duke University - Department of Economics ( email )

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University of Glasgow - Department of Economics

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Glasgow, Scotland G12 8RT
United Kingdom

National Bureau of Economic Research (NBER)

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Mario Cerrato

Glasgow University ( email )

United Kingdom

Zhekai Zhang

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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