Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set
Posted: 10 Jun 2011
Date Written: June 3, 2011
Abstract
We propose an exchange rate model which 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 inter-dealer 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.
Keywords: Exchange rates, Monetary model, Order flow, Microstructure, Forecasting
JEL Classification: D82, E41, F31, F47
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