The currency that came in from the cold - Capital controls and the information content of order flow

Francis Breedon, Thórarinn Pétursson and Paolo Vitale

Economics from Department of Economics, Central bank of Iceland

Abstract: We analyse how capital controls affect FX microstructure, using as a case study the introduction and subsequent removal of controls in Iceland. We use a VAR of private order flow, Central Bank order flow and EURISK that allows for contemporaneous feedback effects to analyse the impact and information content of trades and find that controls have profound effects. When controls were introduced, volume plummeted, the information content of trading activity declined and became less responsive to macro news. While there was no recovery of trading volume after controls were abolished, the information content and responsiveness of trading activity increased sharply.

JEL-codes: C32 F31 F32 G14 G15 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-isf, nep-mon, nep-mst and nep-pay
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Citations: View citations in EconPapers (1)

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Journal Article: The currency that came in from the cold: Capital controls and the information content of order flow (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ice:wpaper:wp86

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