Foreign Exchange Order Flow as a Risk Factor

Craig Burnside, Mario Cerrato and Zhekai Zhang ()
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Mario Cerrato: University of Glasgow
Zhekai Zhang: SAFTI - Shenzhen Audencia Financial Technology Institute, SZU - Shenzhen University [Shenzhen] = 深圳大学, Audencia Business School

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Abstract: We propose a novel pricing factor for currency returns motivated by the market microstructure literature. Our factor aggregates order flow data to provide a measure of buying and selling pressure related to conventional currency trading strategies. It successfully prices the cross-section of currency returns sorted on the basis of forward discount and momentum. The association between our factor and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk-takers in the market, while nonfinancial customers serve as liquidity providers.

Date: 2025-07-08
New Economics Papers: this item is included in nep-mst
Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-05445828v1
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Published in Journal of Financial and Quantitative Analysis, 2025, 60 (5), pp.2555-2582. ⟨10.1017/S0022109024000796⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05445828

DOI: 10.1017/S0022109024000796

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