Understanding Order Flow

Martin Evans and Richard Lyons (lyons@haas.berkeley.edu)

No 11748, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a model for understanding end-user order flow in the FX market. The model addresses several puzzling findings. First, the estimated price-impact of flow from different end-user segments is, dollar-for-dollar, quite different. Second, order flow from segments traditionally thought to be liquidity-motivated actually has power to forecast exchange rates. Third, about one third of order flow's power to forecast exchange rates one month ahead comes from flow's ability to forecast future flow, whereas the remaining two-thirds applies to price components unrelated to future flow. We show that all of these features arise naturally from end-user heterogeneity, in a setting where order flow provides timely information to market-makers about the state of the macroeconomy.

JEL-codes: F3 F4 G1 (search for similar items in EconPapers)
Date: 2005-11
New Economics Papers: this item is included in nep-bec, nep-fin, nep-fmk and nep-for
Note: IFM AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Evans, Martin D. D. and Richard K. Lyons. "Understanding Order Flow," International Journal of Finance and Economics, 2006, v11(1,Jan), 3-23.

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Journal Article: Understanding order flow (2006)
Working Paper: Understanding Order Flow (2005)
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