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Foreign exchange order flow as a risk factor

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  • Craig Burnside
  • Mario Cerrato
  • Zhekai Zhang

Abstract

We propose a novel pricing factor for currency returns motivated by the marketmicrostructure literature. Our factor aggregates order flow data to provide a measure of buying and selling pressure related to conventional currency trading strategies. It successfully prices the cross-section of currency returns sorted on the basis of interest rates and momentum. The association between our factor and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk takers in the market, while non-financial customers serve as liquidity providers.

Suggested Citation

  • Craig Burnside & Mario Cerrato & Zhekai Zhang, "undated". "Foreign exchange order flow as a risk factor," Working Papers 2023-03, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2023-03
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    More about this item

    Keywords

    exchange rates; market microstructure; order flow; carry trade; currency momentum; crash risk; stochastic discount factor;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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