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Equity order flow and exchange rate dynamics

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  • Ferreira Filipe, Sara

Abstract

This paper contributes to the literature on international portfolio choice in several ways. First, I generalize the model of Dunne et al. (2010) and derive order flow as the result of correlated belief changes by heterogeneous investors. This strategy delivers testable implications for the daily dynamics of stock flows, equity returns, and exchange rate changes. Second, I empirically confirm these conditions using fifteen years of high-frequency data for US stocks and daily data for twenty US bilateral exchange rates. Third, the model relies on differences in the volatility of country-specific shocks to account for the empirical results. It can explain why the ‘portfolio rebalancing motive’ is not important for commodity countries, as well as the asymmetric structure of currency and stock returns.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 19 (2012)
Issue (Month): 3 ()
Pages: 359-381

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Handle: RePEc:eee:empfin:v:19:y:2012:i:3:p:359-381

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Exchange rates; Order flow; Stock returns; International portfolio rebalancing;

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Cited by:
  1. Jacob Gyntelberg & Subhanij Tientip & Mico Loretan, 2012. "Exchange Rate Fluctuations and International Portfolio Rebalancing in Thailand," IMF Working Papers 12/214, International Monetary Fund.
  2. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2014. "Uncovered Equity Parity and Rebalancing in International Portfolios," NBER Working Papers 19963, National Bureau of Economic Research, Inc.
  3. Ehsan U. Choudhri & Lawrence L. Schembri, 2013. "Productivity, Commodity Prices and the Real Exchange Rate: The Long-Run Behavior of the Canada-US Exchange Rate," Working Paper Series 45_13, The Rimini Centre for Economic Analysis.

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