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Order Flow and Exchange Rate Dynamics in Brazil

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Author Info
Otavio De Medeiros (Universidade de Brasilia, Brazil)

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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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Publisher 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
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Handle: RePEc:wpa:wuwpfi:0503019

Note: Type of Document - pdf; pages: 10
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Web page: http://129.3.20.41

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

Find related papers by JEL classification:
G - Financial Economics

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References listed on IDEAS
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  1. Mark P. Taylor & Ronald MacDonald, 1991. "Exchange Rate Economics: A Survey," IMF Working Papers 91/62, International Monetary Fund.
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    Other versions:
  3. 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. [Downloadable!]
    Other versions:
  4. Christensen, Michael, 2000. "Uncovered Interest Parity and Policy Behavior New Evidence," Finance Working Papers 00-2, University of Aarhus, Aarhus School of Business, Department of Business Studies.
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  7. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
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  22. Jeffrey A. Frankel & Andrew K. Rose, 1994. "A Survey of Empirical Research on Nominal Exchange Rates," NBER Working Papers 4865, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Evans, George W, 1986. "A Test for Speculative Bubbles in the Sterling-Dollar Exchange Rate: 1981-84," American Economic Review, American Economic Association, vol. 76(4), pages 621-36, September. [Downloadable!] (restricted)
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