An Empirical Study of Liquidity and Information Effects of Order Flow on Exchange Rates
AbstractWe propose a simple structural model of exchange rate determination that draws from the analytical framework recently proposed by Bacchetta and van Wincoop (2003) and allows us to disentangle the liquidity and information effects of order flow on exchange rates. We estimate this model employing an innovative transaction data-set that covers all direct foreign exchange transactions completed in the USD/EUR market via EBS and Reuters between August 2000 and January 2001. Our results indicate that the strong contemporaneous correlation between order flow and exchange rates is mostly due to liquidity effects. This result also appears to carry through to the four FX intervention events that appear in our sample.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4586.
Date of creation: Aug 2004
Date of revision:
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Other versions of this item:
- Breedon, Francis & Vitale, Paolo, 2004. "An empirical study of liquidity and information effects of order flow on exchange rates," Working Paper Series 0424, European Central Bank.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- 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-FIN-2005-02-13 (Finance)
- NEP-FMK-2005-02-13 (Financial Markets)
- NEP-IFN-2005-02-13 (International Finance)
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