A Guided Tour of the Market Microstructure Approach to Exchange Rate Determination
AbstractWe propose a critical review of recent developments in exchange rate economics. This new strand of research is motivated by some very stark empirical evidence, relating exchange rate returns to order flow. Plenty of empirical evidence shows that order flow, i.e. the imbalance in the sequence of purchases and sales of foreign currencies in the markets for foreign exchange, is an extremely powerful determinant of short-run exchange rate movements. With a simplified analytical framework we see how, according to the rational expectation paradigm of asset pricing, such a relation reflects liquidity and information effects of portfolios shifts.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4530.
Date of creation: Aug 2004
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Other versions of this item:
- Paolo Vitale, 2007. "A Guided Tour Of The Market Microstructure Approach To Exchange Rate Determination," Journal of Economic Surveys, Wiley Blackwell, vol. 21(5), pages 903-934, December.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-13 (All new papers)
- NEP-FMK-2005-02-13 (Financial Markets)
- NEP-IFN-2005-02-13 (International Finance)
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