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Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set

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  • MENZIE D. CHINN
  • MICHAEL J. MOORE

Abstract

We propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the Evans–Lyons microstructure approach. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on interdealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or “hybrid,” model exhibits greater in‐sample stability and out of sample forecasting improvement vis‐à‐vis the basic macroeconomic and random walk specifications.
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  • Menzie D. Chinn & Michael J. Moore, 2011. "Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1599-1624, December.
    • Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:8:p:1599-1624
    DOI: j.1538-4616.2011.00460.x
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