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Order Flow and Exchange Rate Dynamics in Brazil

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  • Otavio De Medeiros

    (Universidade de Brasilia, Brazil)

Abstract

The paper presents results of empirical tests with hybrid nominal exchange rate models for the Brazilian foreign exchange market, using macroeconomic and market microstructure variables. The basic model was originally proposed and tested in the German (DM/US$) and the Japanese (¥/US$) foreign exchange markets by Evans and Lyons (2002). We applied the model to the Brazilian foreign exchange market (R$/US$) and obtained significant and correctly signaled coefficients, but the regressions showed low R2s, suggesting the omission of relevant variable(s). The inclusion of an additional variable representing a country-risk premium results significant and increases R2. Estimation by GARCH further improves previous results obtained by OLS. The upshot indicates that the route proposed by Evans and Lyons is a promising explanation for the R$/US$ exchange rate, but it seems the model specification needs further improvement.

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File URL: http://128.118.178.162/eps/fin/papers/0503/0503019.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0503019.

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Length: 10 pages
Date of creation: 16 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0503019

Note: Type of Document - pdf; pages: 10
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Web page: http://128.118.178.162

Related research

Keywords: exchange rate; market microstructure; country risk; order flow; Brazil;

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