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Price Impacts of Deals and Predictability of the Exchange Rate Movements

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  • Takatoshi Ito
  • Yuko Hashimoto

Abstract

This paper examines the price impact and the predictability of the exchange rate movement using the transaction data recorded in the electronic broking system of the spot foreign exchange market. The number of actual deals at the ask (or bid side) for a specified time interval may be regarded as "order flows" to buy (or sell) in Richard Lyons' work. First, the contemporaneous impact of order flows on the quote and deal prices are analyzed. Second, the price predictability is examined. Our forecasting equations of the exchange rate for the next X minutes (X=1, 5, 15, 30) show that coefficients are significantly different from zero in both 5-min and 1-min forecast horizons, but the significance disappears in the 30-minute interval. The t-statistics become larger as the prediction window becomes shorter. Price impacts of deals at one side of the market are significant but short-lived. Market participants, if they can observe and analyze all the transactions information in real time, may be able to extract information to predict the price movements in the following next few minutes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12682.

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Date of creation: Nov 2006
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Publication status: published as Ito, T. and A. Rose (eds.) International Financial Issues in the Pacific Rim, NBER East Asia Seminar on Economics, Volume 17. Chicago: University of Chicago Press, 2008.
Handle: RePEc:nbr:nberwo:12682

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  1. Martin D.D. Evans & Richard K. Lyons, 2005. "Do Currency Markets Absorb News Quickly?," NBER Working Papers 11041, National Bureau of Economic Research, Inc.
  2. Martin D. D. Evans (Georgetown University), 2005. "Understanding Order Flow," Working Papers, Georgetown University, Department of Economics gueconwpa~05-05-19, Georgetown University, Department of Economics.
  3. Richard K. Lyons, 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," NBER Working Papers 4471, National Bureau of Economic Research, Inc.
  4. Torben G. Andersen & Tim Bollerslev, 1998. "Deutsche Mark-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies," Journal of Finance, American Finance Association, American Finance Association, vol. 53(1), pages 219-265, 02.
  5. Takatoshi Ito, 2005. "Interventions and Japanese Economic Recovery," Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University d05-100, Institute of Economic Research, Hitotsubashi University.
  6. Takatosh Ito & Richard K. Lyons & Michael T. Melvin, 1997. "Is there private information in the FX market? the Tokyo experiment," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 97-04, Federal Reserve Bank of San Francisco.
  7. Baillie, R.T. & Bollerslev, T., 1989. "Intra Day And Inter Market Volatility In Foreign Exchange Rates," Papers, Michigan State - Econometrics and Economic Theory 8811, Michigan State - Econometrics and Economic Theory.
  8. Richard K. Lyons, 1996. "Foreign Exchange Volume: Sound and Fury Signifying Nothing?," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 183-208 National Bureau of Economic Research, Inc.
  9. Martin D. D. Evans & Richard K. Lyons, 2005. "Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting," American Economic Review, American Economic Association, American Economic Association, vol. 95(2), pages 405-414, May.
  10. 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, Elsevier, vol. 75(1), pages 93-109, May.
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  12. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, Elsevier, vol. 4(2-3), pages 73-114, June.
  13. Takatoshi Ito, 2002. "Is Foreign Exchange Intervention Effective?: The Japanese experiences in the 1990s," Discussion Paper Series, Institute of Economic Research, Hitotsubashi University a428, Institute of Economic Research, Hitotsubashi University.
  14. Richard K. Lyons & Michael J. Moore, 2005. "An Information Approach to International Currencies," NBER Working Papers 11220, National Bureau of Economic Research, Inc.
  15. Goodhart, Charles A. E. & Payne, Richard G., 1996. "Microstructural dynamics in a foreign exchange electronic broking system," Journal of International Money and Finance, Elsevier, Elsevier, vol. 15(6), pages 829-852, December.
  16. Richard K. Lyons, 2006. "The Microstructure Approach to Exchange Rates," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026262205x, December.
  17. Takatoshi Ito & Yuko Hashimoto, 2004. "Microstructure of the Yen/Dollar Foreign Exchange Market: Patterns of Intra-day Activity Revealed in the Electronic Broking System," NBER Working Papers 10856, National Bureau of Economic Research, Inc.
  18. Alain P. Chaboud & Sergey Chernenko & Edward Howorka & Raj S. Krishnasami Iyer & David Liu & Jonathan H. Wright, 2004. "The high-frequency effects of U.S. macroeconomic data releases on prices and trading activity in the global interdealer foreign exchange market," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 823, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Taylor, Mark P. & Schmidt, Markus & Reitz, Stefan, 2007. "End-user order flow and exchange rate dynamics," Discussion Paper Series 1: Economic Studies 2007,05, Deutsche Bundesbank, Research Centre.
  2. Hashimoto, Yuko & Ito, Takatoshi, 2010. "Effects of Japanese macroeconomic statistic announcements on the dollar/yen exchange rate: High-resolution picture," Journal of the Japanese and International Economies, Elsevier, vol. 24(3), pages 334-354, September.
  3. Evans, Kevin & Speight, Alan, 2010. "International macroeconomic announcements and intraday euro exchange rate volatility," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 552-568, December.
  4. Zhang, Guangfeng & Zhang, Qiong & Majeed, Muhammad Tariq, 2013. "Exchange Rate Determination and Forecasting: Can the Microstructure Approach Rescue Us from the Exchange Rate Disparity?," MPRA Paper 57673, University Library of Munich, Germany.
  5. Yuko Hashimoto & Takatoshi Ito & Takaaki Ohnishi & Misako Takayasu & Hideki Takayasu & Tsutomu Watanabe, 2008. "Random Walk or A Run: Market Microstructure Analysis of the Foreign Exchange Rate Movements based on Conditional Probability," NBER Working Papers 14160, National Bureau of Economic Research, Inc.

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