Equity order flow and exchange rate dynamics

Sara Ferreira Filipe ()

Journal of Empirical Finance, 2012, vol. 19, issue 3, 359-381

Abstract: This paper contributes to the literature on international portfolio choice in several ways. First, I generalize the model of Dunne et al. (2010) and derive order flow as the result of correlated belief changes by heterogeneous investors. This strategy delivers testable implications for the daily dynamics of stock flows, equity returns, and exchange rate changes. Second, I empirically confirm these conditions using fifteen years of high-frequency data for US stocks and daily data for twenty US bilateral exchange rates. Third, the model relies on differences in the volatility of country-specific shocks to account for the empirical results. It can explain why the ‘portfolio rebalancing motive’ is not important for commodity countries, as well as the asymmetric structure of currency and stock returns.

Keywords: Exchange rates; Order flow; Stock returns; International portfolio rebalancing (search for similar items in EconPapers)
JEL-codes: F3 F4 G1 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:19:y:2012:i:3:p:359-381

DOI: 10.1016/j.jempfin.2012.03.002

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