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Microstructure order flow: statistical and economic evaluation of nonlinear forecasts

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  • Mario Cerrato
  • Hyunsok Kim
  • Ronald MacDonald

Abstract

In this paper we propose a novel empirical extension of the standard market microstructure order flow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two different data sets and focusing on out- of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We nd there is a substantial economic value on conditioning on the proposed models.

Suggested Citation

  • Mario Cerrato & Hyunsok Kim & Ronald MacDonald, 2010. "Microstructure order flow: statistical and economic evaluation of nonlinear forecasts," Working Papers 2010_30, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2010_30
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    References listed on IDEAS

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    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
    2. repec:wsi:wschap:9789813148543_0011 is not listed on IDEAS
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    1. repec:eee:jimfin:v:77:y:2017:i:c:p:199-215 is not listed on IDEAS
    2. Batten, Jonathan A. & Lucey, Brian M. & Peat, Maurice, 2016. "Gold and silver manipulation: What can be empirically verified?," Economic Modelling, Elsevier, vol. 56(C), pages 168-176.

    More about this item

    Keywords

    microstructure; order flow; forecasting;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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