Order Flows, News, and Exchange Rate Volatility

Leobniz Universitaet Hannover Working Paper

24 Pages Posted: 1 Mar 2007

See all articles by Michael Frömmel

Michael Frömmel

University of Hannover

Alexander Mende

RPM Risk & Portfolio Management AB; University of Hannover

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Abstract

This paper examines the roles of order flow (reflecting private information) and news (reflecting public information) in explaining exchange rate volatility. Analyzing four months of a bank's high frequency US dollar-euro trading, three order flows are used in addition to seasonal patterns in explaining volatility. We find that only larger sized order flows from financial customers and banks - indicating informed trading - contribute to explaining volatility, whereas flows from commercial customers do not. The result is robust when we control for news and other measures of market activity. This strengthens the view that exchange rate volatility reflects information processing.

Keywords: exchange rate, market microstructure, order flow, financial customer orders, volatility patterns

JEL Classification: F31, G15

Suggested Citation

Frömmel, Michael and Mende, Alexander and Menkhoff, Lukas, Order Flows, News, and Exchange Rate Volatility. Leobniz Universitaet Hannover Working Paper. Available at SSRN: https://ssrn.com/abstract=966068 or http://dx.doi.org/10.2139/ssrn.966068

Michael Frömmel (Contact Author)

University of Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

Alexander Mende

RPM Risk & Portfolio Management AB ( email )

Stureplan 15
SE-111 45 Stockholm
Sweden

University of Hannover

Welfengarten 1
D-30167 Hannover, 30167
Germany

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

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