The Microstructure/Micro-Finance Approach to Exchange Rates

Melody Lo ()
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Melody Lo: University of Texas at San Antonio

Chapter 31 in Encyclopedia of Finance, 2022, pp 945-950 from Springer

Abstract: Abstract The vast empirical failure of standard macro exchange rate determination models in explaining exchange rate movements motivates the development of microstructure approach to exchange rates in the 1990s. The microstructure approach of incorporating “order flow” in empirical models has gained considerable popularity in recent years, since its superior performance to macro exchange rate models in explaining exchange rate behavior. It is shown that order flow can explain about 60% of exchange rate movements versus 60% at most in standard exchange rate empirical models. As the microstructure approach to exchange rates is an active ongoing research area, this chapter briefly discusses key concepts that constitute the approach.

Keywords: Asset market approach; Currency; Divergent mappings; Exchange rates; Goods market approach; Heterogeneous information; Macroexchange rate models; Microstructure approach; Order flow; Private information; Transaction (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_31

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DOI: 10.1007/978-3-030-91231-4_31

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