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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12682.
Length: Date of creation: Nov 2006 Date of revision: Handle: RePEc:nbr:nberwo:12682
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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Martin D. D. Evans & Richard K. Lyons, 2005.
"Understanding Order Flow,"
NBER Working Papers
11748, National Bureau of Economic Research, Inc.
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Martin D. D. Evans (Georgetown University), .
"Understanding Order Flow,"
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gueconwpa~05-05-19, Georgetown University, Department of Economics.
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