Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression
The so-called “foreign exchange rate determination puzzle” has been a hard topic in international finance for several decades. The puzzle illustrates the weak explanatory power of macroeconomic-based models of the nominal exchange rate fluctuations. We investigate the foreign exchange rate determin...
| Main Author: | |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
EconJournals
2017-04-01
|
| Series: | International Journal of Economics and Financial Issues |
| Online Access: | https://www.econjournals.com/index.php/ijefi/article/view/4190 |
| _version_ | 1828029539483123712 |
|---|---|
| author | Zi-Yi Guo |
| author_facet | Zi-Yi Guo |
| author_sort | Zi-Yi Guo |
| collection | DOAJ |
| description |
The so-called “foreign exchange rate determination puzzle” has been a hard topic in international finance for several decades. The puzzle illustrates the weak explanatory power of macroeconomic-based models of the nominal exchange rate fluctuations. We investigate the foreign exchange rate determination puzzle in a continuous-time framework. Following the market microstructure literature, a simple model of the determination of foreign exchange rates is developed, and the model concludes a result which is essentially a continuous-time version of the equation in Evans and Lyons (2002a). For estimation, we take an advantage of a newly-developed econometric tool based on a time change from calendar to volatility time. With this new estimation methodology, our results indicate that the effect of order flow on exchange rate is significantly improved compared with the traditional econometric tools.
Keywords: Order Flow; Time-Change Sampling; Martingale Estimator
JEL Classifications: C22; G15; G17
|
| first_indexed | 2024-04-10T14:12:50Z |
| format | Article |
| id | doaj.art-0bd33ffbb8334d5f98a788931eec1ced |
| institution | Directory Open Access Journal |
| issn | 2146-4138 |
| language | English |
| last_indexed | 2024-04-10T14:12:50Z |
| publishDate | 2017-04-01 |
| publisher | EconJournals |
| record_format | Article |
| series | International Journal of Economics and Financial Issues |
| spelling | doaj.art-0bd33ffbb8334d5f98a788931eec1ced2023-02-15T16:09:40ZengEconJournalsInternational Journal of Economics and Financial Issues2146-41382017-04-0172Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale RegressionZi-Yi Guo0Corporate Model Risk Management Group, Wells Fargo Bank, N.A. The so-called “foreign exchange rate determination puzzle” has been a hard topic in international finance for several decades. The puzzle illustrates the weak explanatory power of macroeconomic-based models of the nominal exchange rate fluctuations. We investigate the foreign exchange rate determination puzzle in a continuous-time framework. Following the market microstructure literature, a simple model of the determination of foreign exchange rates is developed, and the model concludes a result which is essentially a continuous-time version of the equation in Evans and Lyons (2002a). For estimation, we take an advantage of a newly-developed econometric tool based on a time change from calendar to volatility time. With this new estimation methodology, our results indicate that the effect of order flow on exchange rate is significantly improved compared with the traditional econometric tools. Keywords: Order Flow; Time-Change Sampling; Martingale Estimator JEL Classifications: C22; G15; G17 https://www.econjournals.com/index.php/ijefi/article/view/4190 |
| spellingShingle | Zi-Yi Guo Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression International Journal of Economics and Financial Issues |
| title | Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression |
| title_full | Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression |
| title_fullStr | Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression |
| title_full_unstemmed | Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression |
| title_short | Order Flow and Exchange Rate Dynamics in Continuous Time: New Evidence from Martingale Regression |
| title_sort | order flow and exchange rate dynamics in continuous time new evidence from martingale regression |
| url | https://www.econjournals.com/index.php/ijefi/article/view/4190 |
| work_keys_str_mv | AT ziyiguo orderflowandexchangeratedynamicsincontinuoustimenewevidencefrommartingaleregression |