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Order Flows, News, and Exchange Rate Volatility

  • M. FRÖMMEL

    ()

  • A. MENDE
  • L. MENKHOFF

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 US 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://wps-feb.ugent.be/Papers/wp_07_474.pdf
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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 07/474.

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Length: 27 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:rug:rugwps:07/474
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  1. Hoidal Bjonnes, Geir & Rime, Dagfinn, 2003. "Dealer Behavior and Trading Systems in Foreign Exchange Markets," SIFR Research Report Series 17, Institute for Financial Research.
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  12. BAUWENS, Luc & RIME, Dagfinn & SUCARRAT, Genaro, . "Exchange rate volatility and the mixture of distribution hypothesis," CORE Discussion Papers RP 1788, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Bauwens, Luc & Ben Omrane, Walid & Giot, Pierre, 2005. "News announcements, market activity and volatility in the euro/dollar foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1108-1125, November.
  14. Osler, Carol & Mende, Alexander & Menkhoff, Lukas, 2006. "Price Discovery in Currency Markets," Hannover Economic Papers (HEP) dp-351, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  15. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Discussion Papers 391, Statistics Norway, Research Department.
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  17. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
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  19. Gehrig, Thomas & Menkhoff, Lukas, 2003. "The use of flow analysis in foreign exchange: exploratory evidence," Hannover Economic Papers (HEP) dp-276, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  20. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Exchange rates and fundamentals: new evidence from real-time data," Working Paper Series 0365, European Central Bank.
  21. Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 115-158, June.
  22. Richard K. Lyons, 1995. "Foreign Exchange Volume: Sound and Fury Signifying Nothing?," NBER Working Papers 4984, National Bureau of Economic Research, Inc.
  23. Cai, Jun & Cheung, Yan-Leung & Lee, Raymond S. K. & Melvin, Michael, 2001. "'Once-in-a-generation' yen volatility in 1998: fundamentals, intervention, and order flow," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 327-347, June.
  24. DeGennaro, Ramon P. & Shrieves, Ronald E., 1997. "Public information releases, private information arrival and volatility in the foreign exchange market," Journal of Empirical Finance, Elsevier, vol. 4(4), pages 295-315, December.
  25. 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.
  26. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
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