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Short-run Exchange-Rate Dynamics: Theory and Evidence

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Author Info
John A Carlson
Christian M. Dahl
Carol L. Osler () (School of Economics and Management, University of Aarhus, Denmark and CREATES)

Additional information is available for the following registered author(s):

Abstract

Recent research has revealed a wealth of information about the microeconomics of currency markets and thus the determination of exchange rates at short horizons. This information is valuable to us as scientists since, like evidence of macroeconomic regularities, it can provide critical guidance for designing exchange-rate models. This paper presents an optimizing model of short-run exchange-rate dynamics consistent with both the micro evidence and the macro evidence, the first such model of which we are aware. With respect to microeconomics, the model is consistent with the institutional structure of currency markets, it accurately reflects the constraints and objectives faced by the major participants, and it fits key stylized facts concerning returns and order flow. With respect to macroeconomics, the model is consistent with most of the major puzzles that have emerged under floating rates.

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Publisher Info
Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2008-01.

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Length: 56
Date of creation: 07 Jan 2008
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Handle: RePEc:aah:create:2008-01

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Related research
Keywords: Exchange-rate dynamics; currency market microstructure;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

This paper has been announced in the following NEP Reports:

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