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Equity order flow and exchange rate dynamics

Listed author(s):
  • Ferreira Filipe, Sara

This paper contributes to the literature on international portfolio choice in several ways. First, I generalize the model of Dunne et al. (2010) and derive order flow as the result of correlated belief changes by heterogeneous investors. This strategy delivers testable implications for the daily dynamics of stock flows, equity returns, and exchange rate changes. Second, I empirically confirm these conditions using fifteen years of high-frequency data for US stocks and daily data for twenty US bilateral exchange rates. Third, the model relies on differences in the volatility of country-specific shocks to account for the empirical results. It can explain why the ‘portfolio rebalancing motive’ is not important for commodity countries, as well as the asymmetric structure of currency and stock returns.

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File URL: http://www.sciencedirect.com/science/article/pii/S0927539812000163
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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 19 (2012)
Issue (Month): 3 ()
Pages: 359-381

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Handle: RePEc:eee:empfin:v:19:y:2012:i:3:p:359-381
DOI: 10.1016/j.jempfin.2012.03.002
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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  1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
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  18. 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, vol. 75(1), pages 93-109, May.
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  23. Martin D. D. Evans & Richard K. Lyons, 2017. "Time-Varying Liquidity in Foreign Exchange," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 8, pages 325-361 World Scientific Publishing Co. Pte. Ltd..
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  26. Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business), 2005. "A New Micro Model of Exchange Rate Dynamics (March 2004)," Working Papers gueconwpa~05-05-04, Georgetown University, Department of Economics.
  27. Samuel Malone, 2005. "Managing Default Risk for Commodity Dependent Countries: Price Hedging in an Optimizing Model," Economics Series Working Papers 246, University of Oxford, Department of Economics.
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