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Order Flows, News, and Exchange Rate Volatility

Michael Frömmel, Alexander Mende () and Lukas Menkhoff

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper examines the roles of order flow (reflecting private information) and news (reflecting public information) in explaining exchange rate volatility. Analyzing four months of a bank’s high frequency US dollar-euro trading, three different kinds of order flow are used in addition to seasonal patterns in explaining volatility. We find that only larger sized order flows from financial customers and banks – indicating informed trading – contribute to explaining volatility, whereas flows from commercial customers do not. The result is robust when we control for news and other measures of market activity. This strengthens the view that exchange rate volatility reflects information processing.

Keywords: exchange rate; market microstructure; order flow; financial customer orders; volatility patterns (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007-06
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mst
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http://wps-feb.ugent.be/Papers/wp_07_474.pdf (application/pdf)

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Journal Article: Order flows, news, and exchange rate volatility (2008) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:07/474

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