The microstructure approach to exchange rates: a survey from a central bank’s viewpoint

Áron Gereben, Gyorgy Gyomai and Norbert Kiss M. ()
Additional contact information
Norbert Kiss M.: Magyar Nemzeti Bank
Authors registered in the RePEc Author Service: Norbert Kiss M.

No 2005/42, MNB Occasional Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: The application of the market microstructure theory to foreign exchange markets in the last few years has introduced a new approach to the analysis of exchange rates. The most important variable of the microstructure analysis, the so-called order flow has proven to be suitable for explaining a significant part of exchange rate changes, not only for high frequency data, but also at longer time horizons that are relevant for macro-economic analysis. Microstructure theory is thus extremely successful from an empirical point of view, especially when compared to traditional exchange rate models. The aim of our study is to provide an introduction to the microstructure-based analysis of exchange rates, emphasising those aspects which may be the most relevant for central banks. In addition to an introduction to the theoretical background of the microstructure approach and the presentation of the key empirical results, we also intend to cast light upon the questions which are important for central banks and which can be tackled successfully using this framework. On the basis of the literature's findings, we present the answers given by the microstructure approach to, among others, questions concerning the efficiency of central bank intervention, the effects of economic news on exchange rates, and the role of different currency market participants in exchange rate developments.

Keywords: exchange rate; order flow; microstructure. (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2005
New Economics Papers: this item is included in nep-cba, nep-fin, nep-fmk, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.mnb.hu/letoltes/op-42.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mnb:opaper:2005/42

Access Statistics for this paper

More papers in MNB Occasional Papers from Magyar Nemzeti Bank (Central Bank of Hungary) Contact information at EDIRC.
Bibliographic data for series maintained by Lorant Kaszab ( this e-mail address is bad, please contact ).