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Order Flow in the South: Anatomy of the Brazilian FX Market

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  • Wu, Thomas Y

Abstract

This paper explores a unique dataset that contains 100% of the customer áows from domestic dealers in the Brazilian FX retail market. We present two sets of results. First, we Önd a strict link between currency áows from the FX market and the Balance of Payments. Second, we examine the long-run and short-run behaviors of each of the main players in the FX market. Our VECM estimates show that while the commercial customer áow is negatively related to exchange rate trend, the Önancial and the central bank intervention customer áows are positively related to exchange rate deviations from the long run trend. Our impulse response function also show that dealers charge a premium in order to provide unexpected overnight liquidity; that customers have "stabilizing" feedback trading; and that the central bank not only provides liquidity but also leans-against-the-wind when intervening.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt968459j2.

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Date of creation: 09 Dec 2008
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Handle: RePEc:cdl:ucscec:qt968459j2

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Related research

Keywords: Microstructure; Emerging Economies; Exchange Rates; Dealers; Liquid- ity; Central Bank Intervention;

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References

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  1. Harald Hau & Helene Rey, 2002. "Exchange Rate, Equity Prices and Capital Flows," NBER Working Papers 9398, National Bureau of Economic Research, Inc.
  2. Payne, Richard & Vitale, Paolo, 2001. "A Transaction Level Study of the Effects of Central Bank Intervention of Exchange Rates," CEPR Discussion Papers 3085, C.E.P.R. Discussion Papers.
  3. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February.
  4. Geir Hoidal Bjonnes & Dagfinn Rime, 2003. "Dealer Behavior and Trading Systems in Foreign Exchange Markets," Working Paper 2003/10, Norges Bank.
  5. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  6. Carol L. Osler, 2003. "Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis," Journal of Finance, American Finance Association, vol. 58(5), pages 1791-1820, October.
  7. M. Beine & A. Bénassy-Quéré & E. Dauchy & R. MacDonald, 2002. "The Impact of Central Bank Intervention on Exchange-Rate Forecast Heterogeneity," THEMA Working Papers 2002-22, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  8. Kathryn M.E. Dominguez, 2003. "When Do Central Bank Interventions Influence Intra-Daily and Longer-Term Exchange Rate Movements?," NBER Working Papers 9875, National Bureau of Economic Research, Inc.
  9. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Discussion Papers 391, Research Department of Statistics Norway.
  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. Hasbrouck, Joel, 1991. "The Summary Informativeness of Stock Trades: An Econometric Analysis," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 571-95.
  12. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
  13. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
  14. Kenen,Peter B., 2000. "The International Economy," Cambridge Books, Cambridge University Press, number 9780521644358, October.
  15. Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, vol. 42(3-4), pages 275-298, May.
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Cited by:
  1. Esen Onur, 2008. "The role of asymmetric information among investors in the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 368-385.

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