A Guided Tour of the Market Microstructure Approach to Exchange Rate Determination

Paolo Vitale

No 4530, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a critical review of recent developments in exchange rate economics. This new strand of research is motivated by some very stark empirical evidence, relating exchange rate returns to order flow. Plenty of empirical evidence shows that order flow, i.e. the imbalance in the sequence of purchases and sales of foreign currencies in the markets for foreign exchange, is an extremely powerful determinant of short-run exchange rate movements. With a simplified analytical framework we see how, according to the rational expectation paradigm of asset pricing, such a relation reflects liquidity and information effects of portfolios shifts.

Keywords: Order flow; Foreign exchange microstructure; Exchange rate dynamics (search for similar items in EconPapers)
JEL-codes: D82 G14 G15 (search for similar items in EconPapers)
Date: 2004-08
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ifn
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: A GUIDED TOUR OF THE MARKET MICROSTRUCTURE APPROACH TO EXCHANGE RATE DETERMINATION (2007)
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