Asymmetric Price Impacts of Order Flow on Exchange Rate Dynamics PDF Download
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Author: Viet Hoang Nguyen
Publisher:
ISBN: 9780734042460
Category : Foreign exchange rates
Languages : en
Pages : 39
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Book Description
"We generalize the portfolio shifts model advanced by Evans and Lyons (2002a; b), and develop the dynamic asymmetric portfolio shifts (DAPS) model by explicitly allowing for possible market under- and overreactions and for asymmetric pricing impacts of order flows. Using the Reuters D2000-1 daily trading data for eight currency markets over a four-month period from 1 May to 31 August 1996, we find strong evidence of a nonlinear cointegrating relationship between exchange rates and (cumulative) order flows: The price impact of negative order flows (selling pressure) is overwhelmingly stronger than that of the positive ones (buying pressure). Through the dynamic multiplier analysis, we find two typical patterns of the price discovery process. The markets following overreactions tend to display a delayed overshooting and a volatile but faster adjustment towards equilibrium whereas the market following underreactions are generally characterized by a gradual but persistent adjustment. In our model, these heterogeneous adjustment patterns reflect different liquidity provisions associated with different market conditions following under- and overreactions. In addition, the larger is the mispricing, the faster is the overall adjustment speed, a finding consistent with Abreu and Brunnermeier (2002) and Cai et al. (2011). We also find that underreactions are followed mostly by positive feedback trading while overreactions are characterized by delayed overshooting in the short run but corrected by negative feedback trading at longer horizons, the finding is consistent with Barberis et al. (1998) who show that positive short-run autocorrelations (momentum) signal underreaction while negative long-run autocorrelations (reversal) signal overreaction."--Abstract.
Author: Viet Hoang Nguyen
Publisher:
ISBN: 9780734042460
Category : Foreign exchange rates
Languages : en
Pages : 39
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Book Description
"We generalize the portfolio shifts model advanced by Evans and Lyons (2002a; b), and develop the dynamic asymmetric portfolio shifts (DAPS) model by explicitly allowing for possible market under- and overreactions and for asymmetric pricing impacts of order flows. Using the Reuters D2000-1 daily trading data for eight currency markets over a four-month period from 1 May to 31 August 1996, we find strong evidence of a nonlinear cointegrating relationship between exchange rates and (cumulative) order flows: The price impact of negative order flows (selling pressure) is overwhelmingly stronger than that of the positive ones (buying pressure). Through the dynamic multiplier analysis, we find two typical patterns of the price discovery process. The markets following overreactions tend to display a delayed overshooting and a volatile but faster adjustment towards equilibrium whereas the market following underreactions are generally characterized by a gradual but persistent adjustment. In our model, these heterogeneous adjustment patterns reflect different liquidity provisions associated with different market conditions following under- and overreactions. In addition, the larger is the mispricing, the faster is the overall adjustment speed, a finding consistent with Abreu and Brunnermeier (2002) and Cai et al. (2011). We also find that underreactions are followed mostly by positive feedback trading while overreactions are characterized by delayed overshooting in the short run but corrected by negative feedback trading at longer horizons, the finding is consistent with Barberis et al. (1998) who show that positive short-run autocorrelations (momentum) signal underreaction while negative long-run autocorrelations (reversal) signal overreaction."--Abstract.
Author: Martin D. D. Evans
Publisher: Princeton University Press
ISBN: 1400838843
Category : Business & Economics
Languages : en
Pages : 561
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Book Description
A comprehensive and in-depth look at exchange-rate dynamics Variations in the foreign exchange market influence all aspects of the world economy, and understanding these dynamics is one of the great challenges of international economics. This book provides a new, comprehensive, and in-depth examination of the standard theories and latest research in exchange-rate economics. Covering a vast swath of theoretical and empirical work, the book explores established theories of exchange-rate determination using macroeconomic fundamentals, and presents unique microbased approaches that combine the insights of microstructure models with the macroeconomic forces driving currency trading. Macroeconomic models have long assumed that agents—households, firms, financial institutions, and central banks—all have the same information about the structure of the economy and therefore hold the same expectations and uncertainties regarding foreign currency returns. Microbased models, however, look at how heterogeneous information influences the trading decisions of agents and becomes embedded in exchange rates. Replicating key features of actual currency markets, these microbased models generate a rich array of empirical predictions concerning trading patterns and exchange-rate dynamics that are strongly supported by data. The models also show how changing macroeconomic conditions exert an influence on short-term exchange-rate dynamics via their impact on currency trading. Designed for graduate courses in international macroeconomics, international finance, and finance, and as a go-to reference for researchers in international economics, Exchange-Rate Dynamics guides readers through a range of literature on exchange-rate determination, offering fresh insights for further reading and research. Comprehensive and in-depth examination of the latest research in exchange-rate economics Outlines theoretical and empirical research across the spectrum of modeling approaches Presents new results on the importance of currency trading in exchange-rate determination Provides new perspectives on long-standing puzzles in exchange-rate economics End-of-chapter questions cement key ideas
Author: Ingmar Nolte
Publisher: Routledge
ISBN: 1317570774
Category : Business & Economics
Languages : en
Pages : 325
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Book Description
This book brings together the latest research in the areas of market microstructure and high-frequency finance along with new econometric methods to address critical practical issues in these areas of research. Thirteen chapters, each of which makes a valuable and significant contribution to the existing literature have been brought together, spanning a wide range of topics including information asymmetry and the information content in limit order books, high-frequency return distribution models, multivariate volatility forecasting, analysis of individual trading behaviour, the analysis of liquidity, price discovery across markets, market microstructure models and the information content of order flow. These issues are central both to the rapidly expanding practice of high frequency trading in financial markets and to the further development of the academic literature in this area. The volume will therefore be of immediate interest to practitioners and academics. This book was originally published as a special issue of European Journal of Finance.
Author: Martin D. D. Evans
Publisher:
ISBN:
Category : Foreign exchange rates
Languages : en
Pages : 58
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Book Description
Macroeconomic models of nominal exchange rates perform poorly. In sample, R2 statistics as high as 10 percent are rare. Out of sample, these models are typically out-forecast by a na‹ve random walk. This paper presents a model of a new kind. Instead of relying exclusively on macroeconomic determinants, the model includes a determinant from the field of microstructure-order flow. Order flow is the proximate determinant of price in all microstructure models. This is a radically different approach to exchange rate determination. It is also strikingly successful in accounting for realized rates. Our model of daily exchange-rate changes produces R2 statistics above 50 percent. Out of sample, our model produces significantly better short-horizon forecasts than a random walk. For the DM/$ spot market as a whole, we find that $1 billion of net dollar purchases increases the DM price of a dollar by about 1 pfennig.
Author: Richard K. Lyons
Publisher: MIT Press (MA)
ISBN:
Category : Business & Economics
Languages : en
Pages : 360
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Book Description
Explaining the puzzling behavior of exchange rates using models from microstructure finance and data from electronic trading.
Author: Vincent Kleinbrod
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
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Book Description
This paper investigates how order flows drive dynamic co-movements of exchange rates. We allow for asymmetric correlation responses to positive/negative shocks, control for structural breaks, bid-ask spreads and volatility effect of order flows, employ alternative order flow measures, and consider different intraday frequencies. Order flow differences between five major currencies have significant negative effects on the co-movements of their exchange rates vis-à-vis the US dollar. There are two structural breaks in the correlation structures, due to the 2007 GFC and the 2010 EDC. Joint positive shocks are followed by greater comovements of the exchange rates studied than joint negative shocks.
Author: Jeffrey A. Frankel
Publisher: University of Chicago Press
ISBN: 0226260232
Category : Business & Economics
Languages : en
Pages : 358
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Book Description
The foreign exchange market is the largest, fastest-growing financial market in the world. Yet conventional macroeconomic approaches do not explain why people trade foreign exchange. At the same time, they fail to explain the short-run determinants of the exchange rate. These nine innovative essays use a microstructure approach to analyze the workings of the foreign exchange market, with special emphasis on institutional aspects and the actual behavior of market participants. They examine the volume of transactions, heterogeneity of traders, the time of day and location of trading, the bid-ask spread, and the high level of exchange rate volatility that has puzzled many observers. They also consider the structure of the market, including such issues as nontransparency, asymmetric information, liquidity trading, the use of automated brokers, the relationship between spot and derivative markets, and the importance of systemic risk in the market. This timely volume will be essential reading for anyone interested in the economics of international finance.
Author: Stefan Reitz
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
In this paper we provide evidence for Evans and Lyons' (2005b) model of an information aggregation process in FX markets using a German bank's end-user order flow from 2002 to 2003. Though customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the widespread optimism in the market microstructure literature that customer order flow is the high-powered source of information easily exploitable for short-run speculation. Moreover, commercial customers' order flow produces negative coefficients in contemporaneous return regressions, stressing their role as liquidity providers.
Author: Markus A. Schmidt
Publisher: Peter Lang Gmbh, Internationaler Verlag Der Wissenschaften
ISBN: 9783631579282
Category : Foreign exchange
Languages : en
Pages : 0
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Book Description
The microstructure approach provides valuable insights into high-frequent exchange rate dynamics. Recent studies, including this book, evidence the prominence of information asymmetries for asset pricing as well as order flow's important role during information aggregation processes via trading. However, results indicate that dealers quote prices in contrast to predictions of standard theory of asset pricing under asymmetric information. By analysing a unique data set of EUR/USD transactions at a German bank, this work investigates whether this pricing behaviour is due to dealers' strategic dealing considerations or traders' relative market power. The study concludes that it is market power rather than strategic dealing that determines dealers' pricing strategy.
Author: David W. Berger
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
We study the association between order flow and exchange rate returns in five years of high-frequency intraday data from the leading interdealer electronic broking system, EBS. While the association between order flow and exchange rate returns has been studied in several previous papers, these have mostly used relatively short spans of daily data from older bilateral dealing systems and, usually, transaction counts instead of actual trading volume. Using a substantially longer span of recent high-frequency data and measuring order flow as actual signed trading volume, we find a strong positive association between order flow and exchange rate returns at frequencies ranging from one minute to one day, and a more modest but still sizeable association at the monthly frequency. We find, however, no evidence that order flow has predictive power for future exchange rate movements beyond, possibly, the next minute. Focusing on the behavior of order flow and exchange rates at the time of scheduled U.S. economic data releases, we find that the surprise components of these announcements are associated with order flow at high frequency immediately after the data releases. This finding seems inconsistent with a simple efficient markets view of how a public news announcement is incorporated into prices.
