Microstructure order flow: statistical and economic evaluation of nonlinear forecasts
AbstractIn this paper we propose a novel empirical extension of the standard market microstructure order flow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two different data sets and focusing on out- of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We nd there is a substantial economic value on conditioning on the proposed models.
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Bibliographic InfoPaper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2010_30.
Date of creation: Dec 2010
Date of revision:
microstructure; order flow; forecasting;
Other versions of this item:
- Cerrato, Mario & Kim, Hyunsok & MacDonald, Ronald, 2010. "Microstructure Order Flow: Statistical and Economic Evaluation of Nonlinear Forecasts," SIRE Discussion Papers 2010-107, Scottish Institute for Research in Economics (SIRE).
- 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)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-16 (All new papers)
- NEP-FOR-2011-01-16 (Forecasting)
- NEP-MIC-2011-01-16 (Microeconomics)
- NEP-MST-2011-01-16 (Market Microstructure)
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.:
- Pasquale Della Corte & Lucio Sarno & Ilias Tsiakas, 2009.
"An Economic Evaluation of Empirical Exchange Rate Models,"
Review of Financial Studies,
Society for Financial Studies, vol. 22(9), pages 3491-3530, September.
- Della Corte, Pasquale & Sarno, Lucio & Tsiakas, Ilias, 2007. "An Economic Evaluation of Empirical Exchange Rate Models," CEPR Discussion Papers 6598, C.E.P.R. Discussion Papers.
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