A Guided Tour of the Market Microstructure Approach to Exchange Rate Determination

Paolo Vitale

No 4530, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose a critical review of recent developments in exchange rate economics. This new strand of research is motivated by some very stark empirical evidence, relating exchange rate returns to order flow. Plenty of empirical evidence shows that order flow, i.e. the imbalance in the sequence of purchases and sales of foreign currencies in the markets for foreign exchange, is an extremely powerful determinant of short-run exchange rate movements. With a simplified analytical framework we see how, according to the rational expectation paradigm of asset pricing, such a relation reflects liquidity and information effects of portfolios shifts.

Keywords: Order flow; Foreign exchange microstructure; Exchange rate dynamics (search for similar items in EconPapers)
JEL-codes: D82 G14 G15 (search for similar items in EconPapers)
Date: 2004-08
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ifn
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://cepr.org/publications/DP4530 (application/pdf)

Related works:
Journal Article: A GUIDED TOUR OF THE MARKET MICROSTRUCTURE APPROACH TO EXCHANGE RATE DETERMINATION (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4530

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4530

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().