Feedback trading

Jon Danielsson and Ryan Love

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Order flow has been found to carry information to the market. When assessing how informative order flow is, the VAR methodology is typically employed, using impulse response functions. However, in such analyses, the direction of causality runs explicitly from order flow to asset return. If data are sampled at anything other than at the highest frequencies then any feedback trading may well appear contemporaneous; trading in period t depends on the asset return in that interval. The implications of contemporaneous feedback trading are examined in the spot USD/EUR currency market and we find that when data are sampled at the one and five minute frequency, such trading strategies cause the price impact of order flow to be significantly larger than when feedback trading is ruled out.

JEL-codes: G10 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2004-07-09
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