International order flows: explaining equity and exchange rate returns
Author: Dunne, Peter G. ; Hau, Harald ; Moore, MichaelINSEAD Area: FinanceIn: Journal of International Money and Finance, vol. 29, no. 2, March 2010 Language: EnglishDescription: p. 358-386.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: Macroeconomic models of equity and exchange rate returns perform poorly at high frequencies. The proportion of daily returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, we model equity price and exchange rate behavior based on a concept from microstructureorder flow. The international order flows are derived from belief changes of different investor groups in a two-country setting. We obtain a structural relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we construct daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the SandP100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily SandP returns. The model implications are also validated for intraday returns.| Item type | Current location | Call number | Status | Date due | Barcode | Item holds |
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Europe Campus | Available | BC008989 |
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Macroeconomic models of equity and exchange rate returns perform poorly at high frequencies. The proportion of daily returns that these models explain is essentially zero. Instead of relying on
macroeconomic determinants, we model equity price and exchange rate behavior based on a concept from microstructureorder flow. The international order flows are derived from belief changes of different investor groups in a two-country setting. We obtain a structural relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we construct daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the
SandP100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily SandP returns. The model implications are also validated for intraday returns.
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