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Order flows, news, and exchange rate volatility

  • Frömmel, Michael
  • Mende, Alexander
  • Menkhoff, Lukas

This paper examines the roles of order flow (reflecting private information) and news (reflecting public information) in explaining exchange rate volatility. Analyzing four months of a bank's high frequency dollar/euro trading, three different kinds of order flow are used in addition to seasonal patterns in explaining volatility. We find that only larger sized order flows from financial customers and banks - indicating informed trading - contribute to explaining volatility, whereas flows from commercial customers do not. The result is robust when we control for news and other measures of market activity. This strengthens the view that exchange rate volatility reflects information processing.

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File URL: http://www.sciencedirect.com/science/article/B6V9S-4P940GG-1/2/8ad56fee63957a960486bf94e0b6410e
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 6 (October)
Pages: 994-1012

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:6:p:994-1012
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Yin-Wong Cheung & Menzie D. Chinn, 2000. "Currency Traders and Exchange Rate Dynamics: A Survey of the U.S. Market," CESifo Working Paper Series 251, CESifo Group Munich.
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