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Order flow in the South: Anatomy of the Brazilian FX market

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  • Wu, Thomas
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    Abstract

    This paper analyses one of the main pillars of Brazil's newly found economic resilience: a maturing FX market providing support to its managed floating exchange rate regime. I develop a microstructure model suitable to describe the Brazilian FX market, an emerging economy frequently subjected to sudden stops in capital flows. The model introduces two major changes relative to previous microstructure models. First, dealers may decide to hold overnight positions in the FX market if they find it profitable to do so. Second, customers’ demand for foreign exchange is a function of macroeconomic fundamentals, including contemporaneous feedback from exchange rate movements. The main predictions of the model are supported by a unique data set, covering all transactions between dealers and customers from the official Brazilian FX market from July 1, 1999 to June 30, 2003 (a time period in which Brazil suffered two severe external liquidity shocks).

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    Bibliographic Info

    Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

    Volume (Year): 23 (2012)
    Issue (Month): 3 ()
    Pages: 310-324

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    Handle: RePEc:eee:ecofin:v:23:y:2012:i:3:p:310-324

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    Web page: http://www.elsevier.com/locate/inca/620163

    Related research

    Keywords: Microstructure; Exchange rates; Dealers; Liquidity; Central bank intervention;

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    References

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    1. Cheung, Yin-Wong & Chinn, Menzie David & Garcia Pascual, Antonio, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series qt12z9x4c5, Department of Economics, UC Santa Cruz.
    2. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Working Paper 2004/13, Norges Bank.
    3. Evans, Martin D. & Lyons, Richard K., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance, Working Paper Series qt0dh1c16w, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
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    10. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    11. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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    Cited by:
    1. Bahmani-Oskooee, Mohsen & Harvey, Hanafiah & Hegerty, Scott W., 2013. "The effects of exchange-rate volatility on commodity trade between the U.S. and Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 70-93.

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