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Exchange Rate Forecasting, Order Flow and Macroeconomic Information

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Author Info
Rime, Dagfinn
Sarno, Lucio
Sojli, Elvira

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Abstract

This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data collected via a live feed from Reuters for three major exchange rates, we find that: i) order flow is intimately related to a broad set of current and expected macroeconomic fundamentals; ii) more importantly, order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise, on the basis of economic value criteria such as Sharpe ratios and performance fees implied by utility calculations.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7225.

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Date of creation: Mar 2009
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Handle: RePEc:cpr:ceprdp:7225

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Related research
Keywords: exchange rates; forecasting; macroeconomic news; microstructure; order flow;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mario Cerrato & Nicholas Sarantis & Alex Saunders, 2009. "An investigation of customer order flow in the foreign exchange market," Working Papers 2009_25, Department of Economics, University of Glasgow. [Downloadable!]
  2. Nikola Gradojevic & Christopher J. Neely, 2008. "The dynamic interaction of order flows and the CAD/USD exchange rate," Working Papers 2008-006, Federal Reserve Bank of St. Louis. [Downloadable!]
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