Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set

Posted: 10 Jun 2011

See all articles by Michael Moore

Michael Moore

University of Warwick - Warwick Business School

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

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

Suggested Citation

Moore, Michael John and Chinn, Menzie David, Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set (June 3, 2011). Journal of Money, Credit, and Banking, Forthcoming, WBS Finance Group Research Paper No. 160, Available at SSRN: https://ssrn.com/abstract=1857579

Michael John Moore (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-262-7397 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
838
PlumX Metrics