Advanced Search
MyIDEAS: Login

Asymmetric Price Impacts of Order Flow on Exchange Rate Dynamics

Contents:

Author Info

  • Viet Hoang Nguyen

    ()
    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Yongcheol Shin

    (Leeds University Business School, The University of Leeds)

Abstract

We generalize the portfolio shifts model advanced by Evans and Lyons (2002a; b), and develop the dynamic asymmetric portfolio shifts (DAPS) model by explicitly allowing for possible market under- and overreactions and for asymmetric pricing impacts of order flows. Using the Reuters D2000-1 daily trading data for eight currency markets over a four-month period from 1 May to 31 August 1996, we find strong evidence of a nonlinear cointegrating relationship between exchange rates and (cumulative) order flows: The price impact of negative order flows (selling pressure) is overwhelmingly stronger than that of the positive ones (buying pressure). Through the dynamic multiplier analysis, we find two typical patterns of the price discovery process. The markets following overreactions tend to display a delayed overshooting and a volatile but faster adjustment towards equilibrium whereas the markets following underreactions are generally characterized by a gradual but persistent adjustment. In our model, these heterogeneous adjustment patterns reflect different liquidity provisions associated with different market conditions following under- and overreactions. In addition, the larger is the mispricing, the faster is the overall adjustment speed, a finding consistent with Abreu and Brunnermeier (2002) and Cai et al. (2011). We also find that underreactions are followed mostly by positive feedback trading while overreactions are characterized by delayed overshooting in the short run but corrected by negative feedback trading at longer horizons, the finding is consistent with Barberis et al. (1998) who show that positive short-run autocorrelations (momentum) signal underreaction while negative long-run autocorrelations (reversal) signal overreaction.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://melbourneinstitute.com/downloads/working_paper_series/wp2011n14.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2011n14.

as in new window
Length: 40 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:iae:iaewps:wp2011n14

Contact details of provider:
Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
Phone: +61 3 8344 2100
Fax: +61 3 8344 2111
Email:
Web page: http://www.melbourneinstitute.com/
More information through EDIRC

Related research

Keywords: Exchange rate; order flow; under- and overreaction; asymmetric pricing impacts; asymmetric cointegrating relationship and dynamic multipliers;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Hoidal Bjonnes, Geir & Rime, Dagfinn, 2003. "Dealer Behavior and Trading Systems in Foreign Exchange Markets," SIFR Research Report Series 17, Institute for Financial Research.
  2. Boyer, M. Martin & van Norden, Simon, 2006. "Exchange rates and order flow in the long run," Finance Research Letters, Elsevier, vol. 3(4), pages 235-243, December.
  3. Jón Dan�elsson & Ryan Love, 2006. "Feedback trading This paper is also available at www.riskresearch.org," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 35-53.
  4. Martin D. D. Evans, 2002. "FX Trading and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 57(6), pages 2405-2447, December.
  5. Campbell, J.Y. & Kyle, A.S., 1988. "Smart Money, Noise Trading And Stock Price Behavior," Papers 95, Princeton, Department of Economics - Financial Research Center.
  6. Evans, Martin D.D. & Lyons, Richard K., 2005. "Do currency markets absorb news quickly?," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 197-217, March.
  7. Benjamin H. Cohen & Hyun Song Shin, 2003. "Positive feedback trading under stress: Evidence from the US Treasury securities market," BIS Working Papers 122, Bank for International Settlements.
  8. Andrew B. Abel, 1998. "Risk Premia and Term Premia in General Equilibrium," NBER Working Papers 6683, National Bureau of Economic Research, Inc.
  9. Eugene F. Fama, . "Market Efficiency, Long-term Returns, and Behavioral Finance," CRSP working papers 340, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  10. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
  11. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Order Imbalance, Liquidity, and Market Returns," University of California at Los Angeles, Anderson Graduate School of Management qt7gh9t9w3, Anderson Graduate School of Management, UCLA.
  12. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley.
  13. Bacchetta, Philippe & van Wincoop, Eric, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," CEPR Discussion Papers 3808, C.E.P.R. Discussion Papers.
  14. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
  15. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
  16. Brandt, Michael W. & Wang, Kevin Q., 2003. "Time-varying risk aversion and unexpected inflation," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1457-1498, October.
  17. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  18. David A. Chapman, 1998. "Habit Formation and Aggregate Consumption," Econometrica, Econometric Society, vol. 66(5), pages 1223-1230, September.
  19. Martin D. D. Evans & Richard K. Lyons, 2003. "How is Macro News Transmitted to Exchange Rates?," NBER Working Papers 9433, National Bureau of Economic Research, Inc.
  20. Martin Evans and Richard K. Lyons, 2002. "Informational Integration and FX Trading," Working Papers gueconwpa~02-02-11, Georgetown University, Department of Economics.
  21. Martin D. D. Evans & Richard K. Lyons, 2005. "Understanding Order Flow," NBER Working Papers 11748, National Bureau of Economic Research, Inc.
  22. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers 02-16, Duke University, Department of Economics.
  23. 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.
  24. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  25. David Bowman & Deborah Minehart & Matthew Rabin, 1994. "Loss aversion in a consumption/savings model," International Finance Discussion Papers 492, Board of Governors of the Federal Reserve System (U.S.).
  26. Martin Evans and David Lyons, 2001. "Time-Varying Liquidity in Foreign Exchange," Working Papers gueconwpa~01-01-11, Georgetown University, Department of Economics.
  27. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Yuliya Lovcha & Alejandro Perez-Laborda, 2010. "Is exchange rate – customer order flow relationship linear? Evidence from the Hungarian FX market," MNB Working Papers 2010/10, Magyar Nemzeti Bank (the central bank of Hungary).
  2. Verheyen, Florian, 2013. "Exchange rate nonlinearities in EMU exports to the US," Economic Modelling, Elsevier, vol. 32(C), pages 66-76.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:iae:iaewps:wp2011n14. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jenny Chen).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.