Microstructure Order Flow: Statistical and Economic Evaluation of Nonlinear Forecasts

Mario Cerrato, Hyunsok Kim and Ronald MacDonald

No 2010-107, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: In this paper we propose a novel empirical extension of the standard market microstructure order flow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two di¤erent data sets and focusing on out- of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We nd there is a substantial economic value on conditioning on the proposed models.

Keywords: microstructure; order flow; forecasting (search for similar items in EconPapers)
Date: 2010
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Related works:
Journal Article: Microstructure order flow: statistical and economic evaluation of nonlinear forecasts (2015)
Working Paper: Microstructure order flow: statistical and economic evaluation of nonlinear forecasts (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:237

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