Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set |
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| Authors: | MENZIE D CHINN MICHAEL J MOORE |
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| Institution: | 1. Menzie D. Chinn is from the Robert M. La Follette School of Public Affairs;2. and Department of Economics, University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706‐1393 (E‐mail: mchinn@lafollette.wisc.edu);3. Michael J. Moore is from Queens University School of Management, Queens University of Belfast, 25 University Square, Belfast BT7 1NN. Northern Ireland, United Kingdom (E‐mail: m.moore@qub.ac.uk). |
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| Abstract: | We propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the Evans–Lyons microstructure approach. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on interdealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or “hybrid,” model exhibits greater in‐sample stability and out of sample forecasting improvement vis‐à‐vis the basic macroeconomic and random walk specifications. |
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| Keywords: | D82 E41 F31 F47 exchange rates monetary model order flow microstructure forecasting performance |
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