Customer order flow, information and liquidity on the Hungarian foreign exchange market
AbstractCustomer order flow – signed transaction volume between market makers and their customers – is a key concept in the microstructure approach to exchange rates. We attempt to explore what the data tells us about the role of customer order flow in the market for Hungarian forint, using the standard analytical framework of the FX microstructure literature. Our results confirm that customer order flow helps to explain exchange rate fluctuations, which suggests that customer order flow is a key source of information for the market makers. We also find that domestic and foreign customers play significantly different roles on the euro/Hungarian forint market: foreign players' order flow seems to provide the information that drives exchange rate fluctuations, whereas domestic customers are the source of market liquidity. We present evidence suggesting that current order flow from customers is able to provide a significantly better ‘forecast’ for the the exchange rate than the random walk benchmark in a simple Meese-Rogoff-type framework. However, we were unable to improve upon the random walk in a more realistic forecasting exercise. Finally, we highlight some features of our data that suggest that beyond microstructure, the traditional portfolio-balance channel of exchange rate determination is also in place.
Download InfoIf 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.
Bibliographic InfoPaper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2006/8.
Length: 34 pages
Date of creation: 2006
Date of revision:
customer order flow; microstructure; exchange rate.;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-23 (All new papers)
- NEP-CBA-2006-09-23 (Central Banking)
- NEP-FIN-2006-09-23 (Finance)
- NEP-FMK-2006-09-23 (Financial Markets)
- NEP-FOR-2006-09-23 (Forecasting)
- NEP-IFN-2006-09-23 (International Finance)
- NEP-MST-2006-09-23 (Market Microstructure)
- NEP-TRA-2006-09-23 (Transition Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Balazs Egert, 2006.
"Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies,"
CESifo Working Paper Series
1869, CESifo Group Munich.
- Egert, Balazs, 2007. "Central bank interventions, communication and interest rate policy in emerging European economies," Journal of Comparative Economics, Elsevier, vol. 35(2), pages 387-413, June.
- Égert, Balázs, 2006. "Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies," Working Papers 134, Oesterreichische Nationalbank (Austrian Central Bank).
- Balazs Egert, 2006. "Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies," IEHAS Discussion Papers 0615, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
- Michael Frömmel & Norbert Kiss M. & Klára Pintér, 2011.
"Macroeconomic announcements, communication and order flow on the Hungarian foreign exchange market,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 16(2), pages 172-188, 04.
- M. Frömmel & N. Kiss M & K. Pintér, 2009. "Macroeconomic announcements, communication and order flow on the Hungarian foreign exchange market," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/626, Ghent University, Faculty of Economics and Business Administration.
- Michael Frömmel & Norbert Kiss M. & Klára Pintér, 2009. "Macroeconomic announcements, communication and order flow on the Hungarian foreign exchange market," MNB Working Papers 2009/3, Magyar Nemzeti Bank (the central bank of Hungary).
- Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers 49, Brandeis University, Department of Economics and International Businesss School.
- repec:onb:oenbwp:y::i:134:b:1 is not listed on IDEAS
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Johanna Jeney).
If references are entirely missing, you can add them using this form.