Order flow and central bank intervention: An empirical analysis of recent Bank of Japan actions in the foreign exchange market

This paper examines the behaviour of end-user order flows in the foreign exchange market around periods of intense and large-scale intervention activity by the Bank of Japan. First, we find very limited evidence that corporate customers are more than usually likely to be net sellers of yen on days when the Bank of Japan is intervening to sell yen. However, there is somewhat stronger evidence that financial customers are more likely to be net buyers of yen on the same days. Second, we find very clear evidence that intervention matters in a microstructure analysis. The strong contemporaneous correlation between order flows and exchange rate changes essentially disappears on days in which the Bank of Japan intervenes.     

Foreign exchange intervention and equilibrium real exchange rates

Monetary authorities intervene in the currency markets in order to pursue a monetary rule and/or to smooth exchange rate volatility caused by speculative attacks. In the present paper we investigate for possible intervention effects on the volatility of nominal exchange rates and the estimated equilibrium behaviour of real exchange rates. The main argument of the paper is that omission of intervention effects – when they are significant – would bias the ability to detect any PPP-based behaviour of the real exchange rates in the long run. Positive evidence for this argument comes from the experience of six Central and Eastern European economies, whose exchange markets are characterised by frequent interventions.     

外汇市场的定单流决定和影响汇率的理论与实证分析

本文从微观外汇市场结构的视角出发,借助于Evans和Lyons（2001）提出的微观外汇市场结构模型,详细剖析微观外汇市场汇率决定的核心变量一一定单流,指出其功能及在汇率决定中的应用。并分别利用美元与马克以及美元与人民币两个货币对的实际数据通过协整、误差修正模型以及最小二乘回归进行了验证,研究结果表明,人民币／美元汇率波动与定单流之间存在长期的均衡关系,但是整体来看人民币／美元定单流的解释能力没有马克／关元定单流的解释能力那么强,说明虽然我国目前已经具备了微观汇率决定理论的部分前提基础条件,但是,我国外汇市场市场机制完善程度较低是制约定单流功能发挥的重要原因。     

The real exchange rate in the long run: Balassa-Samuelson effects reconsidered

Historical data for over hundred years and 14 countries is used to estimate the long-run effect of productivity on the real exchange rate. We find large variations in the productivity effect across four distinct monetary regimes in the sample period. Although the traditional Balassa-Samuelson model is not consistent with these results, we suggest an explanation of the results in terms of contemporary variants of the model that incorporate the terms of trade mechanism. Specifically we argue that changes in trade costs over time may affect the impact of productivity on the real exchange rate over time. We undertake simulations of the modern versions of the Balassa-Samuelson model to show that plausible parameter shifts consistent with the behavior of trade costs can explain the cross-regime variation of the productivity effect.     

International order flows: Explaining equity and exchange rate returns

Macroeconomic models of equity and exchange rate returns perform poorly at high frequencies. The proportion of daily returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, we model equity price and exchange rate behavior based on a concept from microstructure–order flow. The international order flows are derived from belief changes of different investor groups in a two-country setting. We obtain a structural relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we construct daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily S&P returns. The model implications are also validated for intraday returns.     

Financial factors in foreign direct investments: A dynamic analysis of international data

In contrast to existing empirical foreign direct investment (FDI) studies that examine the static effects of strategic or real economic variables, this paper focuses on the impacts of financial variables on FDI outflows for four largest industrial countries using dynamic time series methods. The results show that FDI outflows are non-stationary but have a long-run cointegrating relationship with real exchange rates. In addition, there are causal effects of exchange rates on direct investments in the short run. Multivariate cointegration analysis shows the significance of financial channels such as cost of capital and real wealth through which the real exchange rate effects operate. The effects of financial channels are comparable to those of the real wage rate channel. Overall, the present paper provides significant and methodologically consistent international evidence for dynamic interactions between FDIs and financial variables.     

Corporate cash flow and stock price exposures to foreign exchange rate risk

This paper estimates the foreign exchange rate exposure of 6917 U.S. nonfinancial firms on the basis of stock prices and corporate cash flows. The results show that several firms are significantly exposed to at least one of the foreign exchange rates Canadian Dollar, Japanese Yen and Euro, and significant exposures are more frequent at longer horizons. The percentage of firms for which stock price and earnings exposures are significantly different is relatively low, though it increases with time horizon. Overall, the impact of exchange rate risk on stock prices and cash flows is similar and determined by a related set of economic factors.     

外汇储备增长与通货膨胀关系研究

在现行外汇体制下,外汇储备增长与通货膨胀之间的关系是个值得探讨的问题。文章使用1998～2010年的月度数据,采用理论分析和实证分析相结合的方法分析外汇储备增长与通货膨胀的关系,得出：外汇储备增长对通货膨胀具有单向因果关系,外汇储备间接导致了通货膨胀。     

Foreign exchange customers and dealers: Who’s driving whom?

This paper tests the theoretical assumption of the foreign exchange market microstructure that dealers and non-dealer customers interact over discrete trading rounds. An exhaustive frequency-domain analysis reveals that the interaction is limited and mainly due to the instability of financial markets. The principal finding is that the trading activity of dealers is able to predict the customer order flow at low frequencies with wavelengths longer than roughly a week. In all, the evidence shows that non-financial customers are not as passive as some other research has suggested.     

Price discovery in foreign exchange markets: A comparison of indicative and actual transaction prices

In this paper, we compare four months of Reuters EFX high frequency indicative data with D2000-1 inter-dealer transaction data for DEM/USD and GBP/USD. Contrary to previous studies, we find, using various information measures, that the matched tick-by-tick indicative data bear no qualitative difference from the transaction data, and have higher information content. Expanding the system to include order flow, due to its growing importance in exchange rate theory, we find that indicative data has a similar impact on order flow as transaction data. However, order flow has no impact on either price.     

Market structure and dealers’ quoting behavior in the foreign exchange market

This article examines how differently the same dealer quotes in the inter-dealer and customer foreign exchange markets that have different market structures. The model first predicts that customer spreads are generally wider than inter-dealer ones due to less transparency in the customer market. The model also predicts that since customers are believed to be less informed than dealers, the differential between customer and inter-dealer spreads tends to fall with the rise in order sizes. In addition, the dealer's mid-quotes are shown to be the same in the two markets. Empirical evidence based on data collected from a FX dealer supports these theoretical findings.     

Fiscal Discipline and Exchange Rate Arrangements: Evidence from the Caribbean

This paper assesses the nature of fiscal discipline under alternative exchange rate regimes. First, it shows that fiscal agencies under a currency union with a fixed exchange rate can have a larger incentive to overspend or "free ride" than those under other exchange rate regimes, owing to the agencies' ability to spread the costs of overspending in inflation tax across both time, given the fixed exchange rate, and space, given the currency union. In contrast, such free-riding behavior does not arise under flexible regimes owing to the immediate inflationary impact of spending. Next, empirically, fiscal stances in countries with fixed pegs and currency union regimes demonstrate greater free-riding behavior than do countries with more flexible regimes in fifteen Caribbean countries from 1983 to 2004.     

如何破解人民币国际化中的特里芬难题--让利率和汇率回归常态

任何一国主权信用货币在国际化过程中都会面临特里芬难题,而人民币国际化中的特里芬难题有其特殊性,如何破解这一难题值得我们深入考虑。文章从分析中国投资驱动、出口导向的增长模式入手,提出中国应尽快打破经济僵局和转变增长方式,让利率和汇率回归常态。更进一步地,文章认为中国应继续完善人民币的国际货币发行机制,同时较为稳步的推进资本项目可兑换。     

Interday and intraday volatility: Additional evidence from the Shanghai Stock Exchange

After examining both the interday and intraday return volatility of the Shanghai Composite Stock Index, it was found that the open-to-open return variance is consistently greater than the close-to-close variance. Examining the volatility of interday returns and variance ratio tests with five-minute intervals reveals an L-shaped pattern, or more precisely, two L-shaped patterns, starting with a small hump during both the morning and the afternoon sessions, with the morning session having a much higher interday volatility than the afternoon session. This L-shaped interday volatility is supported by the similarly shaped intraday volatility pattern. This result suggests that the high volatility of intraday returns for the market open is not entirely due to the trading mechanisms (call auction in the market opening) but also due to both the accumulated overnight information and the trading halt effect. The five-minute breaks after the auction and blind auction procedures are the two major driving forces which exaggerate the high intraday volatility observed at the market open.

Exchange rate determination and inter-market order flow effects

The dependence of foreign exchange rates on order flow is investigated for four major exchange rate pairs, EUR/USD, EUR/GBP, GBP/USD and USD/JPY, across sampling frequencies ranging from 5 min to 1 week. Strong explanatory power is discovered for all sampling frequencies. We also uncover cross-market order flow effects, e.g. GBP exchange rates are very strongly influenced by EUR/USD order flow. We proceed to investigate the predictive power of order flow for exchange rate changes, and it is shown that the order flow specifications reduce RMSEs relative to a random walk for all exchange rates at high-frequencies and for EUR/USD and USD/JPY at lower sampling frequencies.     

Re-examining Cointegration, Unit Roots and Efficiency in Foreign Exchange Rates

This paper examines the cointegrating relationships in seven foreign exchange rates for a sample period from 1974 to 1991 by utilizing Johansen's (1991) method. Three subperiods are also examined to confirm the intertemporal stability of the test results. In addition, subgroups of the seven exchange rates are analyzed to determine the consistency of the empirical results with respect to different dimensions in the system. We find that the test results are sensitive to the choice of test statistics, time trends, subperiods as well as subgroups. All results indicate either one or no cointegrating relationship exists. Further, we study time series properties of twenty one cross-currency rates and the corresponding exchange rates in terms of a common currency. None of cross-currency rates are stationary and hence the pairs of exchange rates are not cointegrated.     

金融危机后我国物价水平变动与货币供应关系研究——基于外汇储备变动视角

2010年以来,我国CPI走势屡创新高,一方面这与国际大宗商品价格持续走高、自然灾害频繁发生导致的粮食减产有关,另一方面也与国外巨额流动性投放以及我国适度宽松货币政策下经济体内流动性充裕有关。本文以外汇储备变动为切入点,对国际金融危机后我国外汇储备变动和物价走势进行分析,考察发达国家量化宽松政策对我国通货膨胀产生的影响。     

Macroeconomic shocks, structural change and real exchange rates: Evidence from historical data

We present empirical evidence on the forces driving real exchange rates in the long-run. Using data from the US, UK and Italy across different exchange rate regimes, we find support for the hypothesis that productivity and fiscal shocks matter. However, in some cases fiscal shocks cause depreciations, likely triggered by the monetary accommodation of fiscal shocks. We also find that the traditional Harrod–Balassa–Samuelson effect of productivity on real exchange rates is reversed in some cases, which confirms the importance of the distributive sector in driving productivity gains.     

Combining conditional volatility forecasts using neural networks: an application to the EMS exchange rates

The present paper examines the out-of-sample forecasting performance of four conditional volatility models applied to the European Monetary System (EMS) exchange rates. In order to provide improved volatility forecasts, the four models’ forecasts are combined through simple averaging, an ordinary least squares model, and an artificial neural network. The results support the EGARCH specification especially after the foreign exchange crisis of August 1993. The superiority of the EGARCH model is consistent with the nature of the EMS as a managed float regime. The ANN model performed better during the August 1993 crisis especially in terms of root mean absolute prediction error.