An Empirical Study of Liquidity and Information Effects of Order Flow on Exchange Rates

Paolo Vitale and Francis Breedon

No 4586, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a simple structural model of exchange rate determination that draws from the analytical framework recently proposed by Bacchetta and van Wincoop (2003) and allows us to disentangle the liquidity and information effects of order flow on exchange rates. We estimate this model employing an innovative transaction data-set that covers all direct foreign exchange transactions completed in the USD/EUR market via EBS and Reuters between August 2000 and January 2001. Our results indicate that the strong contemporaneous correlation between order flow and exchange rates is mostly due to liquidity effects. This result also appears to carry through to the four FX intervention events that appear in our sample.

Keywords: Order flow; Foreign exchange mirror structure; 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 (30)

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Working Paper: An empirical study of liquidity and information effects of order flow on exchange rates (2004)
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