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Macroeconomic Order Flows: Explaining Equity and Exchange Rate Returns

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  • Dunne, Peter
  • Hau, Harald
  • Moore, Michael

Abstract

Macroeconomic models of equity returns perform poorly. The proportion of daily index returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, our model includes a concept from microstructure order flow. Order flow is the proximate determinant of price in all microstructure models. We explain aggregate equity returns as well as exchange rates in a model with heterogenous beliefs. Belief changes are shown to be observable through order flow. To test the model we construct daily aggregate order flow data from all equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and macroeconomic order flows.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4806.

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Date of creation: Dec 2004
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Handle: RePEc:cpr:ceprdp:4806

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Keywords: equities; exchange rates; international macroeconomics; microstructure;

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Cited by:
  1. Menkhoff, Lukas & Schmeling, Maik, 2010. "Whose trades convey information? Evidence from a cross-section of traders," Journal of Financial Markets, Elsevier, vol. 13(1), pages 101-128, February.
  2. Berger, David W. & Chaboud, Alain P. & Chernenko, Sergey V. & Howorka, Edward & Wright, Jonathan H., 2008. "Order flow and exchange rate dynamics in electronic brokerage system data," Journal of International Economics, Elsevier, vol. 75(1), pages 93-109, May.
  3. Martin D. D. Evans (Georgetown University), 2005. "Understanding Order Flow," Working Papers gueconwpa~05-05-19, Georgetown University, Department of Economics.

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