High Frequency Information Content in End-User Foreign Exchange Order Flows

40 Pages Posted: 3 May 2011

See all articles by Ian W. Marsh

Ian W. Marsh

City University London - The Business School

Teng Miao

affiliation not provided to SSRN

Date Written: September 2010

Abstract

This paper considers the impact of foreign exchange order flows on contemporaneous and future stock market returns using a new database of customer order flows in the €-$ exchange rate market as seen by a leading European bank. We do not find clear contemporaneous relationships between FX order flows and stock market changes at high frequencies, but FX flows do appear to have significant power to forecast stock index returns over 1-minute to 30-minute horizons, after controlling for lagged exchange rate and stock market returns. The effects of order flows from financial customers on future stock market changes are negative, while the effects of corporate orders are positive. The latter results are consistent with the premise that corporate order flows contain dispersed, passively acquired information about fundamentals. Thus purchases of the dollar by corporate customers represent good news about the state of the US economy. Importantly, though, there also appears to be extra information in corporate flows which is directly relevant to equity prices over and above the impact derived from stock prices reacting to (predicted) exchange rate changes. Interpretation of the financial customer results is more difficult, although our findings suggest that these flows only affect stock prices through their impact on the value of the dollar.

Keywords: Foreign exchange, order flow, equity returns

Suggested Citation

Marsh, Ian William and Miao, Teng, High Frequency Information Content in End-User Foreign Exchange Order Flows (September 2010). Available at SSRN: https://ssrn.com/abstract=1829309 or http://dx.doi.org/10.2139/ssrn.1829309

Ian William Marsh (Contact Author)

City University London - The Business School ( email )

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HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

Teng Miao

affiliation not provided to SSRN ( email )

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