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An investigation of customer order flow in the foreign exchange market

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  • Mario Cerrato
  • Nicholas Sarantis
  • Alex Saunders

Abstract

This paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new propreitary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs. We make three contributions. First, we investigate the extent to which order flow can help to explain exchange rate movements over and above the influence of macroeconomic variables. Second, we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the microstructure literature. Finally we address the question of whether the out-of-sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets.

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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2009_25.

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Date of creation: Jul 2009
Date of revision: Feb 2010
Handle: RePEc:gla:glaewp:2009_25

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Keywords: Customer order flow; exchange rates; microstructure; forecasting;

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Citations

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Cited by:
  1. Ülkü, Numan & Weber, Enzo, 2013. "Identifying the interaction between stock market returns and trading flows of investor types: Looking into the day using daily data," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2733-2749.
  2. Masayuki Susai & Yushi Yoshida, 2012. "Central bank interventions and limit order behavior in the foreign exchange market," Discussion Papers 56, Kyushu Sangyo University, Faculty of Economics.
  3. Ligon, James A. & Liu, Hao-Chen, 2013. "The relation of trade size and price contribution in a traditional foreign exchange brokered market," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1024-1045.
  4. Chen, Shikuan & Chien, Chih-Chung & Chang, Ming-Jen, 2012. "Order flow, bid–ask spread and trading density in foreign exchange markets," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 597-612.
  5. Chen, Yu-Lun & Gau, Yin-Feng, 2014. "Asymmetric responses of ask and bid quotes to information in the foreign exchange market," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 194-204.

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