Article
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

This paper presents an exchange rate model of a new kind. Instead of relying exclusively on macroeconomic determinants, the model includes a determinant from the field of microstructure financeorder flow. Order flow is a determinant because it conveys information. This is a radically different approach to exchange rates. It is also strikingly successful. Our model of daily deutsche mark/dollar log changes produces an R2 statistic above 60 percent. For the deutsche mark/dollar spot market as a whole, we find that $1 billion of net dollar purchases increases the deutsche mark price of a dollar by 0.5 percent.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... The market microstructure concept mainly discussed two theoretical models for exchange rate determination, such as the Kyle auction model introduced by Ref. [17] and the portfolio-shift model introduced by Ref. [18]. The Kyle auction model is an intuitive microstructure workhorse model that embodies the general logic of the microstructure approach. ...
... The Kyle auction model is an intuitive microstructure workhorse model that embodies the general logic of the microstructure approach. In this model, there are three players at equilibrium: sellers, buyers, and the auctioneer [18]. propose theoretical microstructure models for the foreign exchange market, termed hot-potato trading and portfolio-shift models. ...
... The positive (negative) order flow signals buying (selling) pressure, suggesting positive (negative) returns. One of the most prominent studies by Ref. [18] documented that the exchange rate appreciation is due to an increase in order flow volume and positively traded transactions. Extensive empirical studies have supported the positive linkage between order flow and exchange rates in the shorter period [19][20][21][22]. ...
Article
Full-text available
Nominal exchange rate determination is a puzzling phenomenon throughout the literature. Thus, the study aims to analyze the nominal exchange rate determination with a hybrid approach of macroeconomic and microstructure determinants, i.e., interest rate differential, oil price, order flow, and bid-ask spread over the long-and short-run horizons in the context of Malaysia. The dataset consists of high-frequency daily data from 2010 to 2017, employing a nonlinear ARDL approach. The results indicate that the bid-ask spread and interest rate differential were found to be key determinants of exchange rate dynamics in the long and short run. The findings show strong evidence of long-run asymmetry in the interest rate differential, while short-run asymmetry effects exist between microstructure determinants and the exchange rate. In addition, it indicates that the bid-ask spread holds informative content to explain the dynamics of the exchange rate in Malaysia. Additionally, the negative changes in the oil price could potentially act as macroeconomic news announcements and the bid-ask spread as liquidity determinants in Malaysia, which play a significant role in exchange rate determination. The study concluded that the prominent short-run asymmetry effects captured in cumulative order flow and bid-ask spread While a long-run asymmetry exists between the oil price and exchange rate in Malaysia. The empirical results allow for long-run and short-run asymmetric pricing impacts of a hybrid approach on the nominal exchange rate in Malaysia. This study is helpful in providing policy direction and practical implications for monetary authorities and market dealers. The bid-ask spread and oil price could be considered influential exchange rate determinants in the short run in Malaysia.
... These features can result in "price cascades" when volatility is high. Evans and Lyons(2002) was the first widely acknowledged paper to present an empirical work which shows that "order flow" helps considerably in predicting behaviour in spot FX rates. Order flow is defined as "buying volume -selling volume". ...
... They further show that this cumulative order flow is an important factor in determining the exchange rate, and that its significance is far greater that of the short-term interest rate. Killeen, Lyons and Moore(2003) use the model from Evans and Lyons(2002) to address the excess volatility puzzle. They use daily aggregate inter-dealer data from EBS to explore the volatility in DEM/FRF before and after EMU. ...
... Hausman, link price discreteness to path dependence when their ordered probit analysis concludes that the conditional mean of price changes is determined by the sequence of preceding order-flow. Rime (2000), Lyons(2001), Evans(2002) and Evans and Lyons(2002) all provide strong evidence that FX rates rise in fall in line with aggregate order flow, suggesting that FX rates are similarly path dependent. 0sler (2003) found evidence of links between FX rate path dependence, certain "round number" price points and technical analysis. ...
Thesis
p>This thesis tackles two big questions. The first, from the macroeconomic literature is: what drives price? The second, from the market microstructure literature, is: what determines the bid-ask spread? The classification of these questions under these headings is conventional but is not strictly accurate. While macroeconomics has nothing to say about bid-ask spreads, market microstructure is concerned with price determination. Indeed, market microstructure views the two questions as so closely related that each is a linear function of the other in certain model settings. This duality arises because every transaction price differs from the mid-quote price by the amount of the half-spread. Since the price sequence itself is made up of a series of price innovations, it follows that the average price innovation consists of a half-spread and of mid-quote revisions due to public news releases which are assumed random. However, this relationship does not tell us why bid-ask spreads arise in the first place nor does it fully describe why prices change. Two additional factors which move prices are inventory and asymmetric information. Inventory describes the (usually temporary) imbalances between supply and demand which give rise to the bid-ask spread as a management cost but which nonetheless require price innovations (concessions) to be absorbed. Asymmetric information about future price innovations not only contributes to the bid-ask spreads because of adverse selection risk, but it also drives price. The remaining factor necessary to complete the picture of what determines prices and bid-ask spreads is termed ‘microstructure effects’. These include price discreteness and price clustering. It is a simple fact that prices are not continuous but instead move in discrete units and that some prices are used more frequently than others. For the first time, this thesis reveals the percentage contribution of asymmetric information, inventory and of price clustering to bid-ask spreads in the order-driven inter-dealer spot FX and short term interest rate futures markets. It also quantifies the respective contributions of news and inventory in shaping prices in these markets. Independently, it proves that asymmetric information could not be the dominant driver of prices or of the bid-ask spreads, in both markets. Finally, it shows that the level of asymmetric information in spot FX rates fell precipitously after EMU.</p
... Our data are also suitable because they include tick-by-tick information on dealer-client trades. Some OTC datasets exclude dealer-client trades altogether (e.g., Evans and Lyons, 2002;Bjønnes and Rime, 2005), or provide dealer-client trades only on a daily basis (e.g., Evans and Lyons, 2005;Froot and Ramadorai, 2005). Our data provide individual client identifiers and six client types; other OTC datasets with dealer-client trades often provide no information about clients (e.g., Green et al., 2007) or group clients into a few broad types, such as financial vs. commercial (e.g. ...
... It is not, however, either the liquidity maker or the liquidity taker, so the markup would not reflect this bank's pricing strategies. 8 trading venues and thus capture the market's current complexity, in contrast to most other FX dataset which are limited to one trading platform in the core market (e.g., Evans and Lyons, 2002) or predate the market's fragmentation (Osler et al., 2011). ...
... By the time the Client Bank trades with our dealers the information is second-hand and the price discovery process is far advanced, which could justify adverse selection. 10 In addition, the Client Banks would be informed in a meaningful sense when executing any large trade for their own clients, given price impacts (Evans and Lyons, 2002) and price pressures (Huang and Stoll, 1997;Hendershott and Menkveld, 2014). Here again, by the time our dealer learns about the large trade it may have no opportunity to profit from the information. ...
Preprint
Full-text available
This study shows that first-degree price discrimination drives substantial cross-client variation in OTC bid-ask spreads, and that dealers price discriminate in response to three client characteristics: trading volume, market sophistication, and information. Such discrimination is possible due to the lack of client anonymity and the high trade opacity of OTC markets; it is generally not feasible in order-driven markets. Cross-client variation is substantial in our data, which comprise the complete trading record from a top-10 institution the world's largest OTC market. We develop and test a new spread decomposition model tailored to OTC markets. Price discrimination accounts for 80% of cross-client variation, with the largest contribution from market sophistication.
... After the replication of the Evans and Lyons (2002) to verify the idiosyncratic aspect, Chinn nad Moore develop a model with more explicative variables and a recent dataset. The model is based on some macroeconmic variables (money supply M2, industrial production and interest differential) augmented with the order flow accumulation. ...
... Results are less remarkebale in comparison with Evans and Lyons. The first model to combine micro and macro fundamentals is the 'hybrid' model of Evans and Lyons in 2002; ...
... After collecting the most important theories and models for determining exchange rate, we remark the importance of macroeconomic factors in the long-run explanatory power. After the raise of the macroeconomic puzzles stressed firstly by (MEESE and ROGOFF, 1983), we have chosen to find other exchange rate vision by studying the (Evans and Lyons, 2002) microstructural approach. In our exchange rate determination procedure, we test combination of macroeconomic and microstructure variables in explaining currency change where fundamentals are the governments and central bank's intervention and microstructural variables are the investor's interpretation on the market. ...
Article
Full-text available
This paper represents a new approach in the exchange rate determination by using microstructural and macroeconomic variables. We test a combination of fundamentals and microstructure variables in cointegrated relationship of the USD/JPY and USD/GBP currencies' pairs. The ‘twofold' model includes interest rate, money supply and net foreign assets as fundamentals, and spread and high-low spread as a microstructure variable. Then we compare the different models of macroeconomic and twofold model with the random walk using an error-correction method. We find that the twofold model outperforms the random structural model in out-of-sample and in-sample forecast test for both exchange rates. Twofold model outperforms in out-of-sample forecast the random walk test for the USD/JPY. Keywords: exchange rate, spreads, interest rate, money supply, net foreign assets, twofold model, cointegration JEL Classifications: G15, G17, G18, F31, F62 DOI: https://doi.org/10.32479/ijefi.11305
... This approach facilitates understanding the central role of the trading process in driving price formation in foreign exchange markets. Market microstructure models that build on the original work of Evans and Lyons (2002) have provided additional information in improving the explanatory power of exchange rate driven models (Mokoena et al 2007;Kaltenburnner, 2011;Zhang et al, 2013;Katusime et al 2015). ...
... Firstly, does a 'hybrid' model consisting of macroeconomic factors and market micro structure variables, including order flows, account for exchange rate movements in Zambia? Since the seminal work of Evans & Lyons (2002), several studies have confirmed the impressive explanatory power of order flows in exchange rate determination (Marsh et. al. 2006;Berger et. ...
... This approach seeks to explain exchange rate movements through interaction among foreign exchange traders using publicly unavailable but private information (see Kyle, 1985;Evans, 2011;Evans and Lyons, 2002;. ...
Preprint
Full-text available
Using quantitative and qualitative analysis we find that both ‘macro fundamentals’ (income, the trade balance and interest rate differentials) and ‘market micro structure’ (order flows and Bank of Zambia's sale of dollars) to be important determinants of exchange rate in Zambia. However, the effect of both determinants is found to vary substantially in the short and long run. Expectation formation is also found to be central in this process, especially in the very short run. We explain the sudden and rapid depreciation of the Kwacha as a process of discontinuous behaviour by private agents. Key Words: Exchange Rate Models, Macro Fundamentals, Market Microstructure, Zambia, Africa
... The failure of traditional exchange rate models to empirically explicate and forecast exchange rates movements (Meese & Rogoff, 1983;Frankel & Rose, 1995) has led financial economists and international finance scholars to further research using analytical models that can better explain empirically the determination of exchange rates, as well as forecast exchange rate movements (Banti et al., 2012;Cerrato et al., 2011;Engel et al., 2008). Following this line of research, promising evidence has been provided by Evans and Lyons (2002) and the existence of a strong relationship between exchange rate fluctuations and order flow has been theoretically and empirically demonstrated by Rime et al. (2010). O'Hara (1995) describes the market microstructure method as "… the process and outcomes of exchanging assets under explicit trading rules". ...
... Therefore, order flow turns out to be pivotal in the microstructure approach (Frankel & Rose, 1995). The net buyer-and seller-initiated forex orders are described as currency order flow (Evans & Lyons, 2002). Thus, currency order flow corresponds essentially to what practitioners suggest as buying pressure or selling pressure. ...
... Using daily data of customer order flows for the period 2001 to 2011, and with a total of 2664 trading days for fifteen countries' currencies, their findings show that customer order flow is highly informative, as its predictive power to explain exchange rates is very robust, thereby showing the power to process fundamental information. On the other hand, in his study of currency order flow and the Brazilian real/US dollar exchange rate using Evans & Lyons, 2002model, De Medeiros (2004 shows that the explanatory power of order flow is weak, while the country risk premium appears statistically significant amongst the variables investigated. Besides, Wu (2012) examines the relationship between the commercial and financial customer order flow in the Brazilian foreign exchange market (Real/USD), covering a period of four years (July 1999to June 2003 where the results show that among the variables tested, a positive relationship exists between financial customer order flow, exchange rate movements and intervention flows. ...
Article
Full-text available
This study investigates the role of currency order flow in explaining the emerging Asian markets' exchange rates relying on linear and nonlinear modeling. The daily currency order flow of the US dollar relative to the nine important Asian currencies is constituted and explored with the respective exchange rates. First, we find that order flow affects the spot exchange rate positively for the sampled Asian currencies which indicates that the buying pressure of the US dollar depreciates Asian currencies. Second, the effect of order flow is asymmetric which explains that a surge and a fall in order flow have different effects on the exchange rate. This study unlocks the contribution of the market microstructure research where the asymmetries improve the power to explicate exchange rates. The nonlinear model forecasting performance validates this stance.
... While in short run, microstructure principles such as bid-ask spread and speculative behavior of players govern the movement; in the long run it is explained by macroeconomic shifts also known as asset approach. (Evans & Lyons, 1999) Exchange rate movement in long run can be explained with bilateral macroeconomic changes and trade and capital flows over time. (Chinn, 2012). ...
... (Sengupta and Patnaik, 2021). Though government announced market determined floating regime in 1993, currency flexibility determined as per volatility of reserves, exchange rate and interest rate remained the same from 1979-1999, indicating unchanged de-facto. (Calvo and Reinhart, 2002. ...
Article
Full-text available
India's exchange rate regime has evolved along with international monetary system. It has been successfully using the existing managed float regime to achieve its economic objectives. This study chronologically analyses India's exchange rate movement with focused emphasis after the economic reforms of 1991. It is observed that while endogenous factors such as financial discipline and current account deficit influenced exchange rate movement , the role of exogenous influences are vivid in the economy with each passing year. Major episodes such as-Mexican contagious crises, East Asian crises, 9/11 attack, Global financial crises, Tapering tantrum and COVID-19 pandemic have been discussed along with the policy initiatives taken to tackle these adversities have been analysed. The study concludes with a recommendation of judicial policy mix to the RBI in days ahead.
... These five research streams are associated with each other. The first dynamics of the exchange rate (Andersen et al., 2003;Bekaert, 1994;Betts, 2000;Dumas, 1992;Diebold, 1989;Evans & Lyons, 2002;Jorion, 1990;Jorion, 1995;Lothian & Taylor, 1996;Müller et al., 1990) help to detail the volatility in the exchange rate. Secondly, the research stream on exchange rate volatility using autoregressive models (Bates, 1996;Diebold, 1990;Domowitz, 1985;Engle, 1990;Froot, 1990;Hsieh, 1989;Meese & Etikonomi Volume 21 (1), 2022: 41 -54 Rogoff, 1983Patton, 2006) predicts the random walk-in behavior of exchange rate. ...
... Finally, we put ideas into future research studies that can evaluate the exchange rate volatility in the future presented in Table 6. Andersen et al, (2003), Bekaert (1992), Betts (2000), Dumas (1992), Diebold (1989), Evans & Lyons (2002), Jorion (1990), Jorion (1995), Lothian & Taylor (1996), Muller (1990) 2 Exchange rate volatility using autoregressive model Bates (1996), Diebold (1990), Domowitz (1985), Engle (1990), Froot (1990), Hsieh (1989), Meese (1983), Patton (2006) 3 Relationship between exchange rate and interest rate Devereux (2003), Frenkel (1976), Gali & Monacelli (2005), Kim & Roubini, (2000), Meese & Rogofp (1988), Zhou (1996) 4 Impact of exchange rate volatility on growth, trade and investment Aghion et al. (2009), Kouri (1976, Levy-yeyati (2003), Levyyeyati (2005), Mussa (1979) 5 ...
Article
Full-text available
This study aims to conduct a bibliometric citation and content analysis of the scholarly literature on the behavior and dynamics of the exchange rate (5,295 articles) over the past 85 years between 1935-2020. This research identifies five different research streams such as (i) Dynamics of the exchange rate; (ii) Exchange rate volatility using the autoregressive model; (iii) Relationship between exchange rate and interest rate; (iv) Impact of exchange rate volatility on growth, trade, and investment; (v) Effects of exchange rate fluctuation on firms earning management. In addition to these research streams, the influential articles, authors, journals, organizations, and countries have been evaluated through network diagrams. Finally, sixteen future research questions have been developed through content analysis.How to Cite:Naeem, M., Khan, H. E., & Ali, R. (2022). Bibliometric Literature Review on Exchange Rate: A Future Research Agenda. Etikonomi 21(1), 41-54. https://doi.org/10.15408/etk.v21i1.22412.
... 2 See, among others, Evans and Lyons (2002), Cerrato et al. (2011), Evans (2011), Evans and Rime (2012), Cerrato et al. (2015), Breedon et al. (2016), and Menkhoff et al. (2016). 3 See, for example, Fama (1984a), Engel (1996), Burnside (2012), Burnside (2014), and Engel (2016). ...
... The microstructure literature focuses on bilateral exchange rate behaviour. Lyons et al. (2001) and Evans and Lyons (2002) show that order flow maps a significant part of customers' private information into price discovery and it can explain a large part of exchange rate variation as well as, by extension, currency excess returns. Evans and Lyons (2009) argue that order flow conveys information about future macroeconomic conditions and that this information filters into the exchange rate. ...
... In addition to this cost, the spread is determined by liquidity, reflecting the volume and frequency of financial trades (Danielsson and Payne 2012). The number of studies devoted to exploring the relationship between liquidity and spreads has increased (Bessembinder 1994;Bollerslerv and Melvin 1994;Evans and Lyons 2002;Hartmann 1999;Hasbrouck and Seppi 2001;Hau, Killeen, and Moore 2002). The results of the empirical studies are mixed with regards to this relationship because they use different definitions of liquidity and different proxies to represent it (e.g. ...
... The previous studies on exploring the relationship between liquidity and spread show that the greater trade volume tends to reduce transaction costs, and, thus, spreads (e.g. Bessembinder 1994;Bollerslerv and Melvin 1994;Evans and Lyons 2002;Hartmann 1999;Hasbrouck and Seppi 2001;Hau, Killeen, and Moore 2002). However, in our study focusing on the role of unexpected imbalance risk, the greater trade volume reduces the possibility of illiquidity and the unexpected imbalance risk. ...
Article
Full-text available
This study develops a simple spread model to explain whether market dealers behave strategically when using electronic broking services. Our spread model stresses the role of an unexpected liquidity imbalance and its volatility for inventory risk, which contrasts sharply with previous studies that emphasised price volatility as the inventory risk. To capture a dealer’s strategic behaviour, we introduce a new concept of a strategic weighted spread and test this new spread using the full information maximum likelihood method with the GARCH (1,1) process. Daily spread data from 1 January 2006 to 20 December 2016 is used to explore strategic spreading at the end of a trading day in East Asia. Different effects on strategic spreads of liquidity depth in Asian financial markets are also investigated by comparing strategic spreads between the thin and deep markets. The evidence provides support for our hypothesis that a dealer behaves strategically to avoid the unexpected inventory risk, and that the magnitude of this influence depends on the depth of the financial market.
... Notably, price theories based on stochastic processes typically overlook transaction volume, concentrating instead on pricing trends, akin to an infinite capacity market. However, empirical market data [34][35][36][37] reveal that price and volume are interdependent variables. Indeed, stock markets are structured to optimize transaction volume. ...
Article
Full-text available
This study examines a cross-correlation analysis of companies included in the S&P 500 Index at three different intervals: before, during, and after the pandemic’s onset. The aim is to evaluate how the pandemic and related governmental actions have affected market structures and economic conditions. This paper introduces the notion of momentum time series, integrating return and volume data. We show that these momentum time series provide unique insights that differ from return time series, suggesting their potential utility in economic analysis. Our analysis employs the Manhattan and Mantegna distances to construct a threshold-based network, which we subsequently scrutinize. Lastly, we evaluate how the pandemic has influenced these outcomes.
... The relation between the volume of a market order and the consequent price shift is described by the average price impact function (also called the average market impact function). Recent studies of the impact of a single transaction (Hasbrouck, 1991, Hausman and Lo, 1992, Farmer, 1996, Potters and Bouchaud, 2002, Lillo, Farmer and Mantegna, 2003 have shown that the average market impact is a concave function of either order or transaction volume, matching other studies based on time-aggregated volume (Torre, 1997, Kempf and Korn, 1999, Plerou et al., 2001, Evans and Lyons, 2002). It appears that the average impact varies across markets and stocks. ...
Preprint
For the London Stock Exchange we demonstrate that the signs of orders obey a long-memory process. The autocorrelation function decays roughly as τα\tau^{-\alpha} with α0.6\alpha \approx 0.6, corresponding to a Hurst exponent H0.7H \approx 0.7. This implies that the signs of future orders are quite predictable from the signs of past orders; all else being equal, this would suggest a very strong market inefficiency. We demonstrate, however, that fluctuations in order signs are compensated for by anti-correlated fluctuations in transaction size and liquidity, which are also long-memory processes. This tends to make the returns whiter. We show that some institutions display long-range memory and others don't.
... But the non-linearity may not be very extreme, at least in the case of foreign exchange markets. For instance, Evans and Lyons (2002), who estimate that $ 1 billion of net dollar purchases increases the deutsche mark price of a dollar by 0.5 percent, could not improve their fit by including non-linarities. However, their data set only includes about 80 daily observations. ...
Preprint
This paper investigates - on the basis of the Cont-Bouchaud model - whether a Tobin tax can stabilize foreign exchange markets. Compared to earlier studies, this paper explicitly recognizes that a transaction tax-induced reduction in market depth may increase the price responsiveness of a given order. We find that the imposition of a transaction tax may still achieve a triple dividend: (1) exchange rate fluctuations decrease, (2) currencies are less mispriced, and (3) central authorities raise substantial tax revenues. However, if the price impact function is too sensitive with respect to market depth, stabilization may turn into destabilization.
... However, on the theoretical side, there is not a comprehensive understanding of the mechanisms driving exchange rate movements and their consequential impact on macroeconomic dynamics. Different macroeconomics approaches coexist, either rooted on dynamics optimization (e.g., Rogoff and Obstfeld, 1996;Engel, 2014), or on the microstructure of the foreign exchange market (Evans and Lyons, 2002;Lyons et al., 2001), or on complexity and behavioral explanations Froot, 1986, 1990;Kirman, 1993;De Grauwe and Grimaldi, 2006;Flaschel et al., 2015;Gori and Ricchiuti, 2018). 1 Moreover, the existing frameworks fail short to capture and explain the set of key empirical regularities consistently, including the volatility of exchange rates, their long memory over time, and their often-diffuse relationship with fundamental economic indicators such as interest rates, inflation, and trade balances. These patterns highlight the need for innovative approaches capable of integrating micro and macro dynamics in a coherent framework. ...
... Such a modeling scenario is in line with the empirical evidence provided byEvans and Lyons (2002), according to which the order flow is the dominant driver of the exchange rate. A market-maker scenario is also used in the exchange rate models byManzan and Westerhoff (2007), deGrauwe and Kaltwasser (2012) andGardini et al. (2022). ...
Article
Full-text available
We propose a simple agent-based version of Paul de Grauwe’s chaotic exchange rate model. In particular, we assume that each speculator follows his own technical and fundamental trading rule. Moreover, a speculator’s choice between these two trading philosophies depends on his individual assessment of current market circumstances. Our agent-based model setup is able to explain a number of important stylized facts of foreign exchange markets, including bubbles and crashes, excess volatility, fat-tailed return distributions, serially uncorrelated returns and volatility clustering. A stability and bifurcation analysis of its deterministic skeleton provides us with useful insights that foster our understanding of exchange rate dynamics.
... It should be noted that the impact of macroeconomic events is not only limited to abnormal returns and jumps on exchange rate changes but also affects volatility, volume, and buy/sell spread. Numerous papers particularly evaluate the impact of macroeconomic announcements on the volatility of different markets (DeGennaro & Shrieves, 1997), (Melvin & Yin, 2000), and (Evans & Lyons, 2002). (K. ...
Article
Full-text available
Purpose- Considering the various financial markets, it can be observed that macroeconomic events such as announcement releases might affect the volatility and the direction of price movements in the related markets. While some announcements might play a substantial role in this subject, some might be categorized as unessential announcements in the economic calendars. Reports related to the employment situation, inflation, growth of the domestic product, and commodity reservations of a country are crucial points on the schedule of investors and traders all around the globe. However, reports coming from countries with a major economic share have a much more significant effect on the market. In that regard, researchers are more interested in the evaluation of economic events of countries like the United States, United Kingdom, Germany, and China. In that regard, this study focuses on the impact of the U.S. employment situation report on the XAU/USD spot exchange rate. Methodology- In the first part of the study, the significance of relevant factors of the announcement has been evaluated to specify the importance of the elements included in the employment report. In that interest, an OLS regression model has been developed in the first step. Furthermore, the face and statistical validity phases have been controlled to improve the efficiency of the model. The second part of the study focuses on the direction of the price movement respectively after specific periods from the report’s release. To satisfy the desired goal of the study, two various models have been applied to the data to evaluate the two models and their performances. The first model is based on logistic regression approaches while the second model benefits from XGboost regression. Accuracy metrics have been evaluated for both models to decide on the healthiness of the performances. Findings- Findings demonstrate that the gold spot exchange rate reacts strongly to the announced nonfarm payroll employment figure, while the market takes its revision of the prior month and unemployment rate as additional data around the release of the announcement. Results suggest that employment reports labeled as “bad news” for the U.S. economy caused an increase in the exchange rate of the gold spot. Price discovery for different time intervals after the announcement release shows that the first 10 minutes are the most crucial. Time intervals before the announcement release imply that exchange rate changes are regular and there is not any recognizable pattern for price movements before the announcement release, while abnormal returns start to show up just after the release of the announcement. Conclusion- To sum up, the impact of the announcement report on the price movement of the gold spot is undeniable. However, uncertainties increase before the announcement, and volatility increases after the announcement. Various statuses lead to specific movements in the market. While the uncertainties are lower before the announcement, the price movement of the gold spot would be diverse to the status of the announcement. Keywords: U.S. Nonfarm payrolls, employment report, macroeconomic event study, gold spot, machine learning, decision tree JEL Codes: F31, F62, G15
... The study also found that that liquidity risk was valued in the cross-section of currency yields. However, Evans and Lyons (2002), on the other hand, argued that a sizable share of the movements in the exchange rates could successfully be explained by order flow, which reflects the buying or demand pressure of a currency; when the demand pressure for a currency is lower, the currency will be weaker and vice versa (Gabaix & Maggiori, 2015). ...
Article
This study examined the influence of non-parity factors such as Crude Oil Price, Crude Palm Oil Price, Current Account Balance, Liquidity, Trade Openness, Fiscal Balance, Sovereign Debt, and International Reserves on the Malaysian exchange rate. The effect of non-parity factors on the exchange rate of six major trading partners were investigated using the panel regression model. This analysis used data spread throughout 10 years starting from January 2006 to December 2016. The result shows that the MYR exchange rate was positively impacted by current account balance, trade openness, and sovereign debt and negatively impacted by crude oil price. Based on these findings, policymakers must pay attention to designing favourable trade policies that invite these trade partners to increase trade relations with Malaysia, especially in the domain of Malaysia’s goods and services exports. Meanwhile, policymakers should also emphasise on reducing foreign debt by imposing tighter regulations to control government spending.
... See for example,Evans and Lyons (2002),Chordia et al. (2002),Hasbrouck (1995) orHendershott and Menkveld (2014) or for crypto markets seeMakarov and Schoar (2020) 21 See the Audit Report by JS Heldt, Analysis -Terraform Labs' and Luna Foundation Guard's Defense of the UST Price Peg, November 2022. ...
... A critical factor that may influence the international trade of forest products is the exchange rate that converts foreign currency into domestic currency. Exchange rates are rarely static and can change rather quickly (McGuigan et al., 1999;Evans, 2011;Zhang and Pearse, 2011). For example, with no changes in other supply and demand factors of a forest product, an overvalued currency for an importing country increases the purchasing power of the currency holders and indirectly influences the decisions of buyers and sellers on international markets. ...
Article
In this paper, we investigate the effect of the exchange rate on U.S. softwood plywood imports from Brazil between 2010 and 2021. Using the Equilibrium Displacement Model, we find that the pass-through effect of the U. S. Dollar's appreciation is more perceptible to U.S. consumers when facing a relatively elastic export supply curve from Brazil. Our results suggest that although the U.S. Dollar's strengthening against the Brazilian Real had a detrimental effect on domestic producers of softwood plywood, the consumer's gains more than offset those losses.
... Employing the standard multivariate cointegration methodology developed by Johansen (1988Johansen ( , 1991 and Johansen and Juselius (1990), the empirical results obtained reveal that exchange rates not only adjust to changes monetary fundamentals, but also current accounts. 1 Meese and Rogoff (1983), Meese (1986), McNown and Wallace (1989), Coughlin and Koedijk (1990), Edison and Pauls (1993), Throop (1994) and Rose (1996), Evans and Lyons (2002), Neely and Sarno (2002), Kilian and Taylor (2003), Cheung et al. (2005), among others have provided empirical evidence on the failure of the exchange rate determination models in explaining exchange rate movements. 2 For example, Campbell and Clarida (1987) and Meese and Rogoff (1988), Kearney and MacDonald (1990) and Edison and Pauls (1993) suggest that the monetary fundamentals are not sufficient to drive exchange rate. ...
Article
Previous studies often provide evidence of the inadequacy of the monetary model of exchange rate. Numerous exchange rate researchers have advocated that omission of important variables may have led to such outcome. This study finds that standard monetary fundamentals together with stock prices differential and current accounts differential could establish stable relationship with exchange rates for majority of the ASEAN-5 countries. This finding suggests that besides the monetary variables, the differentials of stock prices or current accounts are crucial variables that cannot be neglected in the monitoring of exchange rate movements
... Relatedly, in earlier work, Bacchetta and van Wincoop (2006), building on the empirical results of Evans and Lyons (2002), find that private information-based order flows drive short-term exchange rate dynamics. ...
... Thus, though the real exchange rate in the short run might get deviated due to sharp fluctuations and price rigidity, in the long run, it is determined by international trade and adjustment in the current account (Kaltenbrunner, 2015). Some literature argues that macro fundamental theories have no role in determining short-run exchange rate movement (Evans & Lyons, 1999). ...
Article
Full-text available
The exchange rate is an important macroeconomic variable that influences internal and external balances. Nepal follows a dual exchange rate such that the Nepali rupee (NPR) is pegged with the Indian rupee (INR) but floats with the United States dollar (USD) and all other currencies. There have been very few studies on the exchange rate of Nepal, of which the majority focus on the bivariate relationship between exchange rate and another variable. However, this paper analyses the multivariate relationship between the USD-NPR exchange rate and major macroeconomic variables. Determinants of Nepal’s exchange rate have been derived with multiple regression using the ordinary least square (OLS) approach. Since the explanatory variables could not significantly capture the movement of the dependent variable, a longrun relationship between Nepal and India’s exchange rate has been analyzed using Engle-Granger cointegration to establish a relationship as suggested by a graphical representation. This explains that Nepal’s exchange rate long run is determined by India’s exchange rate than its own fundamentals. In addition, the macro-linkages of Nepal’s macroeconomic variables have been analyzed using Standard Vector Autoregressive models followed by impulse response analysis which is useful for policy decisions. Some policy implications indicating the sustainability of Nepal’s pegged regime have been drawn based on the empirical analysis. Keywords: Exchange Rate Regime, Macroeconomic Determinants, Cointegration, Vector Autoregressive Models, Impulse Response, Nepal JEL Classification Code: O53, F310, C22, C32
... While non-fundamental news reflects a market's information processing mechanism which may be unrelated to existing macroeconomic fundamentals. For instance, the work of Evans and Lyons (2002) has shown that exchange rates at short horizons are to a significant extent driven by order flow, i.e. excess buyer initiated or sellerinitiated trading. News effects on exchange rates do indeed work through two separate channels. ...
Article
Full-text available
This paper critically analyses the predictability of exchange rates using oil prices. Extant literature that investigates the significance of oil prices in forecasting exchange rates remains largely inconclusive due to limitations arising from methodological issues. As such, this study uses deep learning approaches such as Multi-Layer Perceptron (MLP), Convolution Neural Network (CNN), and Long Short-Term Memory (LSTM) to predict exchange rates. In addition, the Empirical Mode Decomposition (EMD) of time series dataset was utilized to ascertain its effect on the quality of prediction. To examine the efficacy of using oil prices in forecasting exchange rates, bivariate models were also built. Of the three bivariate models developed, the EMD-CNN model has the best predictive performance. Results obtained show that oil price information has a strong influence on forecasting exchange rates.
... A few studies have used more granular data. Evans and Lyons (2002) show a tight correlation between order flow and exchange rate. Broner, Gelos, and Reinhart (2006) focus on country allocations of emerging market funds and look at channels of crisis transmission; Raddatz, Schmukler, and Williams (2017) study empirically how capital flows and benchmarking of funds interact. ...
Article
Full-text available
We examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows, and currencies. Our equilibrium model of incomplete foreign exchange (FX) risk trading where exchange rate risk partially segments international equity markets is consistent with the observed dynamics of equity returns, exchange rates, and fund-level capital flows. We document that rebalancing is more intense under higher FX volatility and find heterogeneous rebalancing behavior across different fund characteristics. A granular instrumental variable approach identifies a positive currency supply elasticity. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
... Pasricha and others (2018) find that capital controls matter mostly for gross flows and not for their net movement, but nevertheless affects exchange rates and monetary policy autonomy. On the impact of order flows and expectations on exchange rates, seeFan and Lyons (2003),Evans and Lyons (2002) andGyntelberg and others (2018). ©International Monetary Fund. ...
... However, criticizing the traditional macroeconomic exchange rate models Meese and Rogoff (1983) provide empirical evidence for the poor performance of these models in predicting the movements in exchange rates in the short run. Therefore, some researchers attempt new approaches to predict exchange rate movements (Glosten & Milgrom, 1985;Kyle,1985;Goodhart et al.,1993;Almeida et al., 1998;Andersen et al., 2003;Evans & Lyons, 2002). These researchers develop new models of exchange rates based on macroeconomic models and microeconomic models, respectively. ...
Article
Full-text available
This paper explores the effects of macroeconomic news on Pak rupee's exchange rates. For this purpose, it employs GARCH models by using real-time data on macroeconomic news and exchange rates. The results exhibit that daily Pak rupee exchange rates dynamics are linked to macroeconomic fundamentals. Both foreign and domestic macroeconomic news announcements significantly affect Pak rupee exchange rates. The exchange rate returns and volatility of Pak rupee immediately adjust to most of the foreign and domestic macroeconomic news. Most of the US and PAK domestic macroeconomic news immediately affect PKR/USD exchange rates as compared to the effect of other foreign and domestic macroeconomic news on other Pak rupee exchange rates. Finally, the paper shows that Pak rupee exchange rate returns and their volatilities are responsive to foreign and domestic macroeconomic news announcements with different magnitudes for all the currency pairs. These findings suggest that the behavior of PAK rupee exchange rate appears to be consistent with the models of exchange rate determination and the monetary authority's reaction function. https://onlinelibrary.wiley.com/doi/epdf/10.1002/ijfe.2176
... El efecto de chivo expiatorio implica una "confusión racional" que sufren los agentes en su interpretación de la realidad. Evans y Lyons (2002) proponen en la "hipótesis del volumen de transacciones" (probada por Rime et al., 2010;Fratzscher et al., 2015), que el sentimiento de confianza en una moneda, al menos en el corto plazo, se relaciona simplemente con los volúmenes de intercambios. Si las personas actúan de forma racional, comprarán las monedas que piensan que sonútiles y seguras. ...
Article
Full-text available
Resumen: Utilizando datos oficiales (Banco de México, INEGI) e información de gran escala proveniente de internet (Google Trends, Twitter), se utiliza un modelo VAR y pruebas de causalidad de Granger para modelar el comportamiento del tipo de cambio peso/dólar (MXN/USD). La po-pularidad en Internet de Trump, en conjunto con mensajes en Twitter conectados con la relación entre México y Estados Unidos, generaron un sentimiento de preocupación que se reflejó en el tipo de cambio, al menos en el corto plazo. El aprendizaje derivado de estos hallazgos es que la información que se genera en redes sociales permite conocer el comportamiento de variables fundamentales para la economía. Abstract: Using official data (Banco de México, INEGI) and large-scale information from the Internet (Google Trends, Twitter), a VAR model and Granger causality tests are used to model the behavior of the peso/dollar exchange rate. Trump's online popularity, along with messages on Twitter regarding the relationship between Mexico and the United States, generated a feeling of concern which was reflected in the exchange rate, at least in the short term. The main learning derived from these findings is that the information generated in social networks allows us to know the behavior of fundamental economic variables.
... Our starting point is the empirical literature (Fleming and Remolona (1999); Evans and Lyons (2002); Brandt and Kavajecz (2004);Menkveld et al. (2012)) on the role of orderflow in driving prices in various dealer markets. Because orderflow has a price impact, private information about future orderflow can be used profitably. ...
Article
We propose a new measure of private information in decentralized markets – connections – which exploits the time-variation in the number of dealers with whom a client trades in a time period. Using trade-level data for the UK government bond market, we show that clients perform better when having more connections as their trades predict future price movements. Time-variation in market-wide connections also helps explain yield dynamics. Given our novel measure, we present two applications suggesting that (i) dealers pass on information, acquired from their informed clients, to their affiliates, and (ii) informed clients better predict the orderflow intermediated by their dealers. This article is protected by copyright. All rights reserved
... Andersen, Bollerslev, Diebold, and Vega (2003) reported that bad news have a greater impact than good news. Price predictability in the FOREX was analysed by Lyons (1995) and Evans and Lyons (2002), who found that order flows can explain exchange rate movements much more effectively than fundamentals. Wan and Kao (2009) explored contrarian effects in the FOREX, and Chelley-Steeley and Tsorakidis (2013) carried out a bid-ask spread analysis to detect the most attractive currency pair for speculators. ...
Article
Full-text available
This paper analyses the explanatory power of the frequency of abnormal returns in the FOREX over the period 1994–2019. The following hypotheses are tested: frequency of abnormal returns is asignificant driver of price movements (H1); it does not exhibit seasonal patterns (H2); it is stable over time (H3). For our purposes avariety of statistical methods are applied including ADF, PP and KPSS tests, Granger causality tests, correlation analysis, regression analysis, Probit and Logit regression models. No evidence is found of either seasonal patterns or instability. However, there appears to be astrong positive (negative) relationship between returns in the FOREX and the frequency of positive (negative) abnormal returns. On the whole, the results suggest that the latter is an important driver of price dynamics in the FOREX, is informative about crises and can be the basis of profitable trading strategies, which is inconsistent with market efficiency.
... He theorized that the real returns to forward speculation should be explained by consumption based estimates of risk premia. He attributes the failure of his consumption based model to (a) data difficulties (b) agents who incorporate into their thinking unrealized expected policy changes and (c) non-separability of utility over time; improper accounting, , hidden peso problems, Kaminiski and Perruga (1990); and systematic rational forecast errors, Lewis Alvarez et al (2002); limited attention, perpetual learning, Chakraborty and Evans (2008); deep habits, Verdelhan (2007); overcon…dence, Burnside et al. (2011), limited participation, rational inattention, infrequent portfolio rebalancing, Bacchetta and van Wincoop (2005; ambiguity, distorted beliefs and regime switching, Caskey (2008) Other reasons that have been suggested include, di¤erences in levels of economic development and di¤erential degrees of biasedness, Bansal and Dalquist (2000) and Frankel and Poonwalla (2009); order ‡ow, Lyons (2002), Breedon et al. (2016); persistent conditional variances and strong endogeneity, Gospodinov (2009), default and sovereign risk, Coudert and Mignon (2013), Kesse (2017); omitted variable bias and exchange rate volatility, Kellard and Sarantis (2008), Gospodinov (2009); risky money market and swap rates, Skinner andMason (2011), andCsává (2016). 14 Our work is closest in spirit to those papers of Stoll (1972) and Stein (1965) which we extend to an environment of uncertainty. ...
Conference Paper
Full-text available
We develop a discrete-time intertemporal IRPT model under conditions of generalized uncertainty, where heterogeneous market participants are faced with common trading quotes. These participants are all assumed to be expected utility maximizers and may be risk loving, risk seeking or risk neutral. Market participants act as if there is unpriced risk in the forward markets. In its simplest version, the certainty equivalent forward rate , which is not observed is defined as, Observed Forward rate+1/2 Pratt Arrow risk averse volatility. Under conditions of zero uncertainty and/or risk neutrality, our derived certainty equivalent relation collapses to the standard IRPT relation. An empirical testing of the model with learning embedded, explains the puzzling paradox popularized by Fama (JME 1984).
... Everything else being equal, a buy [sell] order submitted by a trader is more likely to be interpreted as causing the price to increase [decrease]. Consequently, order flow has an impact on the direction of the FX price movement (Lyons, 1997;Evans and Lyons, 2002). Empirically, this relationship has been shown to hold, at least in the short run (see, for instance, Evans and Lyons, 2005;King and Rime, 2010;Payne, 2003). ...
Article
This paper investigates the susceptibility of foreign exchange (FX) spot markets to limit order submission strategies that are either intended to create a false impression of the state of the market (‘spoof orders’) or to extract hidden information from the market (‘ping orders’). Using a complete limit order book dataset from Electronic Broking Services (EBS), our findings suggest that spoofing is more likely to succeed in liquid markets, or on primary electronic trading platforms. Pinging, by contrast, might be more prevalent in illiquid markets, or on secondary electronic trading platforms.
... Order size, on the other hand, tends to influence order routing and orderflow. It is well known that aspects of orderflow strongly affect price impact, with aggressive and passive order placement being the most exemplary one (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12). Therefore, in order to investigate the effect of concentration on price impact, we must take into account the known price effects * In the paper, we use the term 'order' to denote the aggregate buying or selling by a single exchange member firm. ...
Preprint
Full-text available
We show that filling an order with a large number of distinct counterparts incurs additional market impact, as opposed to filling the order with a small number of counterparts. For best execution, therefore, it may be beneficial to opportunistically fill orders with as few counterparts as possible in Large-in-scale (LIS) venues. This article introduces the concept of concentrated trading, a situation that occurs when a large fraction of buying or selling in a given time period is done by one or a few traders, for example when executing a large order. Using London Stock Exchange data, we show that concentrated trading suffers price impact in addition to impact caused by (smart) order routing. However, when matched with similarly concentrated counterparts on the other side of the market, the impact is greatly reduced. This suggests that exposing an order on LIS venues is expected to result in execution performance improvement.
... Payne (2003) provide evidence that asymmetric information accounts for 60% of average bid/ask spreads. Evans and Lyons (2002) examine the role of order flow in foreign exchange markets. Closely related to this paper, Mancini et al. (2013) conduct a liquidity analysis of nine currency pairs using high-frequency exchange rate transaction and order book data. ...
... Until fairly recently, measures of monetary policy uncertainty focused on unsystematic interest rate fluctuations stemming from unexpected changes in US monetary policy [see, Andersen et al. (2003), Faust et al. (2003), Evans and Lyons (2002), and Simpson et al. (2005)]. However, more recent approaches to measuring MPU rely on using news-based index of monetary policy uncertainty (MPU) to proxy the unsystematic component of and/or news about monetary policy. ...
Article
Full-text available
We examine the impact of US monetary policy uncertainty (MPU) on the dollar exchange rates of ten Asian economies between February 2006 and January 2019. Our results, which are based on an EGARCH model, indicate that MPU tends to increase the variance of exchange rates rather than affecting the level of exchange rates. The results may have significant implications for the ten economies’ conduct of monetary policy.
... Payne (2003) provide evidence that asymmetric information accounts for 60% of average bid/ask spreads. Evans and Lyons (2002) examine the role of order flow in foreign exchange markets. Closely related to this paper, Mancini et al. (2013) conduct a liquidity analysis of nine currency pairs using high-frequency exchange rate transaction and order book data. ...
Preprint
Full-text available
We analyze liquidity provision on Kraken, one of the major cryptocurrency exchanges, and compare the results to the foreign exchange (FX) and the stock market, recognizing that Bitcoin has originally been designed as a digital currency and evolved to an investment. In a first step, we characterize liquidity based on traditional models for market microstructure to capture different aspects of the spread. These measures unanimously indicate that the Bitcoin market on Kraken is extremely illiquid compared to the FX markets and usually less liquid than the stocks in our stock market sample. In a second step, we identify liquidity determinants and show that both market specific characteristics (e.g., noise, volatility) and blockchain characteristics play a role in explaining on-exchange liquidity.
... However, criticizing the traditional macroeconomic exchange rate models Meese and Rogoff (1983) provide empirical evidence for the poor performance of these models in predicting the movements in exchange rates in the short run. Therefore, some researchers attempt new approaches to predict exchange rate movements (Glosten & Milgrom, 1985;Kyle,1985;Goodhart et al.,1993;Almeida et al., 1998;Andersen et al., 2003;Evans & Lyons, 2002). These researchers develop new models of exchange rates based on macroeconomic models and microeconomic models, respectively. ...
Article
This article explores the effects of macroeconomic news on Pak rupee's exchange rates. For this purpose, it employs GARCH models by using real‐time data on macroeconomic news and exchange rates. The results exhibit that daily Pak rupee exchange rates dynamics are linked to macroeconomic fundamentals. Both foreign and domestic macroeconomic news announcements significantly affect Pak rupee exchange rates. The exchange rate returns and volatility of Pak rupee immediately adjust to most of the foreign and domestic macroeconomic news. Most of the US and PAK domestic macroeconomic news immediately affect PKR/USD exchange rates as compared to the effect of other foreign and domestic macroeconomic news on other Pak rupee exchange rates. Finally, the article shows that Pak rupee exchange rate returns and their volatilities are responsive to foreign and domestic macroeconomic news announcements with different magnitudes for all the currency pairs. These findings suggest that the behaviour of PaK rupee exchange rate appears to be consistent with the models of exchange rate determination and the monetary authority's reaction function.
... banks (a quantity measure) in forecasting exchange rates. In the literature, it is well known that some FX market quantities like order flow are associated with contemporaneous returns (e.g., Evans and Lyons 2002), however, it is less known whether predictive information is contained. 30 ...
Article
The USD asset share of non-U.S. banks captures the demand for dollars by these investors. An instrumental variable strategy identifies a causal link from the USD asset share to the USD exchange rate. Cross-sectional asset pricing tests show that the USD asset share is a highly significant pricing factor for carry trade strategies. The USD asset share forecasts the dollar with economically large magnitude, high statistical significance, and large explanatory power, both in sample and out of sample, pointing towards time varying risk premia. It takes 2-5 years for exchange rate risk premia to normalize in response to demand shocks.
... Essentially, these studies laid more emphasis on private information. It is explained that investor order flows cause exchange rate changes through private information, which when released, could have significant effects on exchange rate(Evans and Lyons, 2002). More recently, studies have confirmed that with proper econometric tools and models, macroeconomic fundamentals could accurately forecast exchange rate (seeEichenbaum et al., 2017 andItskhoki andMukhin, 2017). 2 Other causes identified in the literature are: endogeneity and/or persistence and parameter instability. ...
Article
Full-text available
This study applies portfolio balance theory in forecasting exchange rate. The study further argues for the need to account for the role of Global Financial Cycle (GFCy). As such, the first stage of the analysis is estimate a GFCy model and obtain the idiosyncratic shock. Next, we use the results in the first stage as a predictor for exchange rate. The study builds dataset for 20 advanced and emerging countries from 1990Q1-2017Q2. Among other things, there are three important results to note. First, our approach to forecast exchange rate is able to beat the benchmark random walk model. Second, the best prediction is made at short term forecasting horizons, i.e. 1 and 4 quarters forecast ahead. Third, the performance of the early sample size outweighs that of the late sample size.
Preprint
This paper examines the intra-day seasonality of transacted limit and market orders in the DEM/USD foreign exchange market. Empirical analysis of completed transactions data based on the Dealing 2000-2 electronic inter-dealer broking system indicates significant evidence of intraday seasonality in returns and return volatilities under usual market conditions. Moreover, analysis of realised tail outcomes supports seasonality for extraordinary market conditions across the trading day.
Article
Full-text available
This research aims to determine the effect of the global COVID-19 pandemic on the exchange rate, where the microstructure approach will be used, which uses long and short positions in the futures market. Weekly data will be available during the period 2010-2023. A negative relationship has been found between the exchange rate and the net positions, as well as a positive relationship between the exchange rate and the interest rate differential between Mexico and the United States, as indicates the existing literature. The main finding has been the presence of structural change in the relationship due to the COVID-19 pandemic. Therefore, it is concluded that the microstructure approach is an adequate model to explain exchange rate fluctuations in the short-term, where the relationship has suffered a structural change due to the pandemic.
Article
Full-text available
Este artículo evalúa las implicaciones en el corto plazo de las expectativas cambiarias en mercados de crédito, afectados por problemas de selección adversa, y modela un mercado de crédito donde los contratos de deuda son contingentes en el ingreso de los prestatarios. Los activos riesgosos que estos últimos poseen están denominados en moneda extranjera y su valor en libros, estipulado en los contratos de deuda, se traduce usando las expectativas sobre el tipo de cambio basadas en las premisas del análisis técnico. Este artículo muestra que la información pública, generada por la tendencia adversa del tipo de cambio, mueve al mercado de crédito hacia un equilibrio donde la inversión y el crédito se contraen, y definen el espacio para la intervención del gobierno. En este contexto, el gobierno responde a la información generada por la tendencia del tipo de cambio e incrementa el tamaño de programa, a fin de estabilizar las variaciones en la tasa de interés, lo cual evita que la inversión y la liquidez se reduzcan.
Article
Full-text available
This paper studies the nexus between asset returns volatility in six major segments of Indian financial markets (viz. money, equity, gsec, forex, equity and banking stocks) and macro-economic shocks (viz. GDP, Inflation, Current Account Deficit, market capitalisation to GDP ratio, US Treasury Yield and Foreign Portfolio Investment). The period of study is from April 2002 to March 2021, a period covering four instances of significant economic and financial market stress. Findings of the study are generally aligned to economic theory, except for the case of gsec market. Besides, macro-variables were found to be exerting greater impact when they are in their weaker/unstable state and the behaviour of US treasury yield and FPI flows were found be more significant factors during stress periods and recovery immediately thereafter. Therefore, there is a need to focus on maintaining macroeconomic stability as a policy to foster financial market stability. Besides, there is a need to monitor a customized and dynamic list of macroeconomic variables in respect of each of the financial market segments to decide on the timing, type and quantum of policy and regulatory responses from time to time. This study contributed towards financial markets public policy, particularly during periods of uncertainties.
Article
Full-text available
In a number of countries, especially emerging market economies, the public sector has in recent years been accumulating sizeable cross-border financial assets, mainly in the form of official foreign exchange reserves. World reserves have risen from USD 1.2 trillion in January 1995 to above USD 4 trillion in September 2005, growing particularly rapidly since 2002. This paper investigates the features, drivers, risks and costs of such recent reserve accumulation, as well as the other uses that certain countries have been making of their accumulated foreign assets. The main trends in central bank reserve management are also reviewed. Finally, the paper provides some evidence for the impact of reserve accumulation on yields and asset prices. JEL Classification:
Article
Full-text available
This paper provides a new test for whether different-currency assets are imperfect substitutes. The test exploits that under floating rates, changing public currency demand has no direct effect on monetary fundamentals, current or future. Price effects from imperfect substitutability are clearly present: the immediate price impact of public trades is 0.44 percent per 1 billion dollar (of which, about 80 percent persists indefinitely). This estimate is applicable to intervention trades in the special case when they are indistinguishable from private trades (i.e., when interventions are sterilized, anonymous, and provide no monetary-policy signal).
Preprint
Full-text available
This paper examines the trading behavior of individual investors using a proprietary intraday dataset of a large pool of retail investor aggregate (minute by minute) long and short positions in EUR/USD for the period July 2014 to April 2016. Standard event study analysis shows no significant adjustment in trading ahead of scheduled macro news announcements and trading contrary to the announcement surprise after the event. A panel regression analysis shows that the contrarian trading behavior is mostly driven by lagged returns rather than fundamental macro news. Further intraday time series analysis shows that the lagged overall news sentiment also significantly affects investor net order flow. Finally, we show that simple cross-over trading strategies that exploit retail investor order flow imbalance are profitable. Overall our results suggest that retail investors in currency markets follow the news and are influenced by news sentiment and past returns, but do not possess the skills to extract fundamental information from public news. Their trading behavior contributes to the slowdown of the price discovery process. Our findings support the differential abilities of market participants to interpret public information as an explanation for the importance of order flow in price formation in currency markets.
Article
Full-text available
In the last two decades, the Banco de la República de Colombia has assiduously intervened in the foreign exchange market, except in the last 5 years. The objectives are to accumulate international reserves, reduce excess of exchange rate volatility and moderate deviations of the exchange rate with respect to its trend. This article assesses the magnitude and duration of the exchange rate impact of the different types and instruments of foreign exchange intervention and derives policy implications. The most important results are: First, the transmission channels of exchange rate policy act to a certain degree and under certain conditions. Second, the different types of intervention or instruments have little or no impact on the exchange rate and are short-lived. Third, there is no evidence that oral intervention has any exchange rate effect. Fourth, the structure of the foreign exchange market impacts the transmission of the intervention through its degree of liquidity. Fifth, the initial conditions of the economy and the type of shock it experiences influence the size, duration, and degree of transmission of the intervention. The most important policy implication is that floating exchange rate, as has happened in recent years, is the right policy.
Article
I explore the launching of a Brazilian massive program of foreign exchange (FX) interventions in August 2013 to compare discretionary and pre-announced interventions. Using an external instrument approach, I find that Brazilian currency (BRL) appreciates 29.4 bps for each USD 1 billion discretionary intervention and the impact is significant up to the following day of the intervention. In contrast, an intraday event-study shows that the pre-announced intervention program caused a total BRL appreciation of 460 bps. Its public release accounted for 120 bps, while the impact of individual auctions was spread over two months and accounted for the remaining 340 bps. Finally, discretionary interventions are more effective per USD billion.
Article
Full-text available
Intervention in the foreign exchange market and capital controls are two controversial policy options that many countries have adopted in order to influence the exchange rate and moderate capital flows. The objective of this paper is to examine their effectiveness for a representative Emerging Market economy. The main findings indicate that neither central bank intervention nor capital controls used separately were successful for depreciating the exchange rate but have the side effect of augmenting its volatility. Nonetheless, during a period when both policies were used simultaneously, they were effective to impact the exchange rate, without increasing its volatility.
ResearchGate has not been able to resolve any references for this publication.