End-user order flow and exchange rate dynamics

Mark P. Taylor (), Markus Schmidt and Stefan Reitz ()

No 2007,05, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre

Abstract: In this paper we provide evidence for Evans and Lyons' (2005b) model of an information aggregation process in FX markets using a German bank's end-user order flow from 2002 to 2003. Though customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the widespread optimism in the market microstructure literature that customer order flow is the high-powered source of information easily exploitable for short-run speculation. Moreover, commercial customers' order flow produces negative coefficients in contemporaneous return regressions, stressing their role as liquidity providers.

Keywords: Foreign exchange; market microstructure; end-user order flow (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mst
Date: Written
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