Is exchange rate – customer order flow relationship linear? Evidence from the Hungarian FX market

Yuliya Lovcha () and Alejandro Perez-Laborda

No 2010/10, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: over the last decade, the microstructure approach to exchange rates has become very popular. The underlying idea of this approach is that the order flows at different levels of aggregation contain valuable information to explain exchange rate movements. The bulk of empirical literature has focused on evaluating this hypothesis in a linear framework. This paper analyzes nonlinearities in the relation between exchange rates and customer order flows. We show that the relationship evolves over time and that it is different under different market conditions defined by exchange rate volatility. Further, we found that the nonlinearity can be captured successfully by the Threshold regression and Markov Switching models, which provide substantial explanatory power beyond the constant coefficients approach.

Keywords: customer order flows; nonlinear models; microstructure; exchange rate (search for similar items in EconPapers)
JEL-codes: C22 F31 G15 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Is exchange rate – Customer order flow relationship linear? Evidence from the Hungarian FX market (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mnb:wpaper:2010/10

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