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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. Osler, Carol & Mende, Alexander & Menkhoff, Lukas, 2006. "Price Discovery in Currency Markets," Hannover Economic Papers (HEP) dp-351, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
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  12. Geir H. Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2002. "Volume and Volatility in the FX-Market: Does it matter who you are?," CESifo Working Paper Series 786, CESifo Group Munich.
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  18. Covrig, Vicentiu & Melvin, Michael, 2002. "Asymmetric information and price discovery in the FX market: does Tokyo know more about the yen?," Journal of Empirical Finance, Elsevier, vol. 9(3), pages 271-285, August.
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