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Multiscale analysis of foreign exchange order flows and technical trading profitability

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  • Gradojevic, Nikola
  • Lento, Camillo

Abstract

This paper investigates the multiscale (frequency-dependent) relationship between technical trading profitability and feedback trading effects in the Canada/U.S. dollar foreign exchange market. The results suggest that technical trading activities of financial customers drive frequent violations of the FX market microstructure assumption that exchange rate movements are driven by order flow. After controlling for transaction costs, we find that the contribution of financial customers in feedback trading dominates the contribution of non-financial customers, especially at lower frequencies. An additional, novel contribution is that technical indicators constructed from order flows can be profitable.

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  • Gradojevic, Nikola & Lento, Camillo, 2015. "Multiscale analysis of foreign exchange order flows and technical trading profitability," Economic Modelling, Elsevier, vol. 47(C), pages 156-165.
    • Handle: RePEc:eee:ecmode:v:47:y:2015:i:c:p:156-165
    DOI: 10.1016/j.econmod.2015.02.028
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    More about this item

    Keywords

    Foreign exchange markets; Order flows; Technical trading; Frequency domain;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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