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Short-run Exchange-rate Dynamics: Theory And Evidence

  • John A. Carlson

    (Purdue University)

  • Christian M. Dahl

    (University of Aarhus)

  • Carol L. Osler


    (International Business School, Brandeis University)

Recent research has revealed a wealth of information about the microeconomics of currency markets and thus the determination of exchange rates at short horizons. This information should help in designing exchange-rate models. This paper analyzes an existing model that was previously demonstrated to be consistent with most of the major puzzles that have emerged under floating rates. It shows that this model is also consistent with most of the major new insights from microstructure. The model is consistent with the institutional structure of currency markets, it accurately reflects the constraints and objectives of major participants, and it fits key stylized facts concerning returns and order flow.

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Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 39.

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Length: 48 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:brd:wpaper:39
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