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  • Jón Daníelsson

    (Financial Markets Group, London School of Economics and Political Science, UK)

  • Ryan Love

    (Financial Markets Group, London School of Economics and Political Science, UK)

Order flow has been found to carry information to the market. When assessing how informative order flow is, the VAR methodology is typically employed, using impulse response functions. However, in such analyses, the direction of causality runs explicitly from order flow to asset return. If data are sampled at anything other than at the highest frequencies then any feedback trading may well appear contemporaneous; trading in period t depends on the asset return in that interval. The implications of contemporaneous feedback trading are examined in the spot USD|EUR currency market and we find that when data are sampled at the 1 and 5 minute frequencies, such trading strategies cause the price impact of order flow to be significantly larger than when feedback trading is ruled out. Copyright © 2006 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.286
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 11 (2006)
Issue (Month): 1 ()
Pages: 35-53

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Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:1:p:35-53
DOI: 10.1002/ijfe.286
Contact details of provider: Web page: http://www.interscience.wiley.com/jpages/1076-9307/

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  1. Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
  2. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  3. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
  4. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
  5. Martin Evans, 2000. "FX trading and Exchange Rate Dynamics," Working Papers gueconwpa~00-00-04, Georgetown University, Department of Economics.
  6. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
  7. A. R. Pagan & J. C. Robertson, 1998. "Structural Models Of The Liquidity Effect," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 202-217, May.
  8. Roberto Rigobon & Brian Sack, 2003. "Spillovers Across U.S. Financial Markets," NBER Working Papers 9640, National Bureau of Economic Research, Inc.
  9. Richard K. Lyons & Michael J. Moore, 2005. "An Information Approach to International Currencies," NBER Working Papers 11220, National Bureau of Economic Research, Inc.
  10. Benjamin Cohen & Hyun Song Shin, 2002. "Positive feedback trading under stress: evidence from the US Treasury securities market," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 148-180 Bank for International Settlements.
  11. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
  12. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
  13. T. Clifton Green, 2004. "Economic News and the Impact of Trading on Bond Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1201-1234, 06.
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