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Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression

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  • Zi-Yi Guo

    (Corporate Model Risk Management Group, Wells Fargo Bank, N.A., 301 S College St, Charlotte, NC 28202, USA.)

Abstract

The so-called foreign exchange rate determination puzzle has been a hard topic in international finance for several decades. The puzzle illustrates the weak explanatory power of macroeconomic-based models of the nominal exchange rate fluctuations. We investigate the foreign exchange rate determination puzzle in a continuous-time framework. Following the market microstructure literature, a simple model of the determination of foreign exchange rates is developed, and the model concludes a result which is essentially a continuous-time version of the equation in Evans and Lyons (2002a). For estimation, we take an advantage of a newly-developed econometric tool based on a time change from calendar to volatility time. With this new estimation methodology, our results indicate that the effect of order flow on exchange rate is significantly improved compared with the traditional econometric tools.

Suggested Citation

  • Zi-Yi Guo, 2017. "Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 507-512.
    • Handle: RePEc:eco:journ1:2017-02-66
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    Cited by:

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    2. David Koch & Steve Ofili & Abel Cudjoe, 2017. "Identifications of the Distribution of Treatment Effect with Duration Outcomes," Journal of Banking and Financial Dynamics, Sophia, vol. 1(1), pages 36-41.
    3. Hiroyuki Taguchi & Jambaldorj Bolortuya, 2019. "Inflation Targeting and the Pass-through Effect in Mongolia," Business and Economic Research, Macrothink Institute, vol. 9(2), pages 57-71, June.
    4. Firouzi, Shahrokh & Wang, Xiangning, 2019. "A comparative study of exchange rates and order flow based on wavelet transform coherence and cross wavelet transform," Economic Modelling, Elsevier, vol. 82(C), pages 42-56.
    5. Fredy Gamboa-Estrada, 2023. "The Role of Foreign Investors and Local Agents in the Derivatives Market and their Impact on the Exchange Rate in Colombia: A Wavelet Analysis," IHEID Working Papers 12-2023, Economics Section, The Graduate Institute of International Studies.

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    More about this item

    Keywords

    Order Flow; Time-change Sampling; Martingale Estimator;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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