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Feedback trading This paper is also available at www.riskresearch.org

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Jón Daníelsson & Ryan Love, 2006. "Feedback trading This paper is also available at www.riskresearch.org," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 35-53.
  • Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:1:p:35-53
    DOI: 10.1002/ijfe.286
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    File URL: http://hdl.handle.net/10.1002/ijfe.286
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    References listed on IDEAS

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    4. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    5. Martin D. D. Evans, 2017. "FX Trading and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 5, pages 189-245 World Scientific Publishing Co. Pte. Ltd..
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    8. Lyons, Richard K. & Moore, Michael J., 2009. "An information approach to international currencies," Journal of International Economics, Elsevier, vol. 79(2), pages 211-221, November.
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    10. 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.
    11. 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.
    12. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
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