Dealer Activity and Macro Fundamentals: New Evidence from Hybrid Exchange Rate Models

Ingomar Krohn*, Michael J. Moore

*Kontaktforfatter af dette arbejde

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Resumé

We construct a new class of hybrid exchange rate models, combining macroeconomic fundamentals from a conventional Taylor rule with information from the foreign exchange interdealer market. We provide evidence that hybrid models have a superior model fit and produce more accurate in-sample predictions than their individual nested components. As part of our analysis, we employ a new market microstructure measure, based on submitted and cancelled limit orders, and document its significant impact on monthly exchange rate returns. We show that its effect is transitory and largely diminishes in a stylized out-of-sample forecasting exercise, while market order flow can improve short-term forecasts. Our comprehensive empirical assessment is based on one of the largest foreign exchange interdealer order flow datasets analyzed so far. It comprises 19 U.S. dollar and euro currency pairs and covers a sample period of more than 10 years.
OriginalsprogEngelsk
TidsskriftJournal of International Money and Finance
Vol/bind95
Sider (fra-til)363-378
Antal sider16
ISSN0261-5606
DOI
StatusUdgivet - jul. 2019
Udgivet eksterntJa

Emneord

  • Exchange rates
  • Taylor rule
  • Order flow
  • FX market microstructure

Citer dette

@article{cc4c961005984093a43f6d351cf30f2f,
title = "Dealer Activity and Macro Fundamentals: New Evidence from Hybrid Exchange Rate Models",
abstract = "We construct a new class of hybrid exchange rate models, combining macroeconomic fundamentals from a conventional Taylor rule with information from the foreign exchange interdealer market. We provide evidence that hybrid models have a superior model fit and produce more accurate in-sample predictions than their individual nested components. As part of our analysis, we employ a new market microstructure measure, based on submitted and cancelled limit orders, and document its significant impact on monthly exchange rate returns. We show that its effect is transitory and largely diminishes in a stylized out-of-sample forecasting exercise, while market order flow can improve short-term forecasts. Our comprehensive empirical assessment is based on one of the largest foreign exchange interdealer order flow datasets analyzed so far. It comprises 19 U.S. dollar and euro currency pairs and covers a sample period of more than 10 years.",
keywords = "Exchange rates, Taylor rule, Order flow, FX market microstructure, Exchange rates, Taylor rule, Order flow, FX market microstructure",
author = "Ingomar Krohn and Moore, {Michael J.}",
year = "2019",
month = "7",
doi = "10.1016/j.jimonfin.2018.03.007",
language = "English",
volume = "95",
pages = "363--378",
journal = "Journal of International Money and Finance",
issn = "0261-5606",
publisher = "Pergamon Press",

}

Dealer Activity and Macro Fundamentals : New Evidence from Hybrid Exchange Rate Models. / Krohn, Ingomar; Moore, Michael J.

I: Journal of International Money and Finance, Bind 95, 07.2019, s. 363-378.

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

TY - JOUR

T1 - Dealer Activity and Macro Fundamentals

T2 - New Evidence from Hybrid Exchange Rate Models

AU - Krohn, Ingomar

AU - Moore, Michael J.

PY - 2019/7

Y1 - 2019/7

N2 - We construct a new class of hybrid exchange rate models, combining macroeconomic fundamentals from a conventional Taylor rule with information from the foreign exchange interdealer market. We provide evidence that hybrid models have a superior model fit and produce more accurate in-sample predictions than their individual nested components. As part of our analysis, we employ a new market microstructure measure, based on submitted and cancelled limit orders, and document its significant impact on monthly exchange rate returns. We show that its effect is transitory and largely diminishes in a stylized out-of-sample forecasting exercise, while market order flow can improve short-term forecasts. Our comprehensive empirical assessment is based on one of the largest foreign exchange interdealer order flow datasets analyzed so far. It comprises 19 U.S. dollar and euro currency pairs and covers a sample period of more than 10 years.

AB - We construct a new class of hybrid exchange rate models, combining macroeconomic fundamentals from a conventional Taylor rule with information from the foreign exchange interdealer market. We provide evidence that hybrid models have a superior model fit and produce more accurate in-sample predictions than their individual nested components. As part of our analysis, we employ a new market microstructure measure, based on submitted and cancelled limit orders, and document its significant impact on monthly exchange rate returns. We show that its effect is transitory and largely diminishes in a stylized out-of-sample forecasting exercise, while market order flow can improve short-term forecasts. Our comprehensive empirical assessment is based on one of the largest foreign exchange interdealer order flow datasets analyzed so far. It comprises 19 U.S. dollar and euro currency pairs and covers a sample period of more than 10 years.

KW - Exchange rates

KW - Taylor rule

KW - Order flow

KW - FX market microstructure

KW - Exchange rates

KW - Taylor rule

KW - Order flow

KW - FX market microstructure

UR - https://sfx-45cbs.hosted.exlibrisgroup.com/45cbs?url_ver=Z39.88-2004&url_ctx_fmt=info:ofi/fmt:kev:mtx:ctx&ctx_enc=info:ofi/enc:UTF-8&ctx_ver=Z39.88-2004&rfr_id=info:sid/sfxit.com:azlist&sfx.ignore_date_threshold=1&rft.object_id=954921381799&rft.object_portfolio_id=&svc.holdings=yes&svc.fulltext=yes

U2 - 10.1016/j.jimonfin.2018.03.007

DO - 10.1016/j.jimonfin.2018.03.007

M3 - Journal article

VL - 95

SP - 363

EP - 378

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

SN - 0261-5606

ER -