Is exchange rate – Customer order flow relationship linear? Evidence from the Hungarian FX market

Yuliya Lovcha () and Alejandro Perez-Laborda

Journal of International Money and Finance, 2013, vol. 35, issue C, 20-35

Abstract: Over the last decade, the microstructure approach to exchange rates has become very popular. The underlying idea of this approach is that the order flows at different levels of aggregation contain valuable information to explain exchange rate movements. The bulk of empirical literature has focused on evaluating this hypothesis in a linear framework. This paper analyzes non-linearities in the relation between exchange rates returns and customer order flows. We show that the relationship evolves over time and that it is different under different exchange rate volatility conditions. Further, we found that the non-linearity can be captured successfully by the Transition Regression and Markov Switching models, which provide substantial explanatory power beyond the constant coefficients approach.

Keywords: Customer order flow; Markov Switching model; Structural threshold model; Microstructure; Exchange rate (search for similar items in EconPapers)
JEL-codes: C22 F31 G15 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Working Paper: Is exchange rate – customer order flow relationship linear? Evidence from the Hungarian FX market (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:35:y:2013:i:c:p:20-35

DOI: 10.1016/j.jimonfin.2013.01.002

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