Exchange rate determination and inter-market order flow effects |
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| Authors: | Jón Daníelsson Jinhui Luo |
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| Affiliation: | 1. Department of Finance and Financial Markets Group , London School of Economics , Houghton St, London , WC2A 2AE , UK;2. ICBC, 55 Funingmennei Avenue, Beijing , China , 100032 |
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| Abstract: | 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. |
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| Keywords: | F0 F3 G1 |
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