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Short-run Exchange-Rate Dynamics: Theory and Evidence

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  • John A Carlson
  • Christian M. Dahl
  • Carol L. Osler

    ()
    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

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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Bibliographic 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
Date of revision:
Handle: RePEc:aah:create:2008-01

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Web page: http://www.econ.au.dk/afn/

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Keywords: Exchange-rate dynamics; currency market microstructure;

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Cited by:
  1. Ding, Liang & Ma, Jun, 2013. "Portfolio reallocation and exchange rate dynamics," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(8), pages 3100-3124.
  2. Maurice J. Roche & Michael J. Moore, 2009. "Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs," Working Papers, Ryerson University, Department of Economics 001, Ryerson University, Department of Economics.
  3. Tracy Yue Wang & David Hirshleifer & Bing Han, 2010. "Investor Overconfidence and the Forward Discount Puzzle," 2010 Meeting Papers, Society for Economic Dynamics 1201, Society for Economic Dynamics.
  4. Michael R. King & Carol Osler & Dagfinn Rime, 2013. "The market microstructure approach to foreign exchange - Looking back and looking forward," Working Paper, Norges Bank 2013/12, Norges Bank.
  5. Martin Grandes & Marcel Peter & Nicolas Pinaud, 2010. "Pricing the Currency Premium Under Flexible Exchange Rates: Evidence from South Africa," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, Central Bank of Argentina, Economic Research Department, vol. 1(60), pages 7-52, October -.
  6. Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers, Brandeis University, Department of Economics and International Businesss School 49, Brandeis University, Department of Economics and International Businesss School.
  7. Geir H. Bjønnes & Carol L. Osler & Dagfinn Rime, 2009. "Asymmetric information in the interbank foreign exchange market," Working Paper, Norges Bank 2008/25, Norges Bank.

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