Foreign exchange order flow as a risk factor

Craig Burnside, Mario Cerrato and Zhekai Zhang

Working Papers from Business School - Economics, University of Glasgow

Abstract: We propose a novel pricing factor for currency returns motivated by the marketmicrostructure literature. Our factor aggregates order flow data to provide a measure of buying and selling pressure related to conventional currency trading strategies. It successfully prices the cross-section of currency returns sorted on the basis of interest rates and momentum. The association between our factor and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk takers in the market, while non-financial customers serve as liquidity providers.

Keywords: exchange rates; market microstructure; order flow; carry trade; currency momentum; crash risk; stochastic discount factor (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-ifn and nep-mst
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