Exchange Rate Forecasting, Order Flow and Macroeconomic Information

Lucio Sarno, Dagfinn Rime and Elvira Sojli

No 7225, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data collected via a live feed from Reuters for three major exchange rates, we find that: i) order flow is intimately related to a broad set of current and expected macroeconomic fundamentals; ii) more importantly, order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise, on the basis of economic value criteria such as Sharpe ratios and performance fees implied by utility calculations.

Keywords: Exchange rates; Forecasting; Macroeconomic news; Microstructure; Order flow (search for similar items in EconPapers)
JEL-codes: F31 F41 G10 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-cba, nep-for, nep-ifn, nep-mac, nep-mon and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Journal Article: Exchange rate forecasting, order flow and macroeconomic information (2010)
Working Paper: Exchange rate forecasting, order flow and macroeconomic information (2007)
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