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

Ingomar Krohn*, Michael J. Moore

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review


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.
Original languageEnglish
JournalJournal of International Money and Finance
Pages (from-to)363-378
Number of pages16
Publication statusPublished - Jul 2019
Externally publishedYes


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

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